ASHK Risk Management Regional Conference · Regulatory powers on insurance companies Necessary to...
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ASHK Risk Management Regional ASHK Risk Management Regional
ConferenceConference
Mr Allan Yu
Governing Committee Member
The Hong Kong Federation of Insurers
7 May 2013
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Overview of the Hong Kong Overview of the Hong Kong
Insurance MarketInsurance Market
� Total gross premiums in 2012 :
HK$255.2 billion (12.5% of Hong Kong’s GDP)
◦ life premium: HK$215.9 billion
◦ general insurance premium: HK$39.3 billion
� 154 authorized insurers (91 general insurance insurers, 44 life insurers & 19 composite insurers)
� 604 authorized insurance brokers with 8,798registered persons
� 65,438 registered insurance agents/technical representatives
Total work force > 85,000
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Current Regulatory Regime Current Regulatory Regime
� The current regulator is the Office of Commissioner of Insurance (OCI), a government department under the Financial Services and the Treasury Bureau
� Direct supervision of insurers by OCI:
◦ capital requirement
◦ solvency requirement
◦ fitness & properness of management and shareholders
◦ adequacy of reinsurance arrangements, etc
� Self-regulation for insurance intermediaries through Self-Regulatory Organizations (SROs) as authorized by OCI:
◦ business conduct
◦ licencing and administration of registered persons
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The 3 SelfThe 3 Self--regulatory Organizationsregulatory Organizations
HK Confederation of Insurance
Brokers
Insurance Agents Registration Board
Professional Insurance Brokers
Association
Insurance Companies OrdinanceInsurance Companies Ordinance
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Impending Regulatory Changes in Impending Regulatory Changes in
Hong Kong Hong Kong
1. Establishment of an Independent Insurance Authority (IIA)
2. Risk-Based Capital Framework
(RBC)
3. Policyholders’ Protection Fund
(PPF)
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1) Establishment of an 1) Establishment of an
Independent Insurance Independent Insurance
Authority (IIA)Authority (IIA)
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Supervise insurers
(prudential
supervision)
Maintain general
stability of the
insurance market
Protect policyholders’
interests
Proposed Additional Functions
Thematic researches
& studies
Existing Principal Functions
Functions of an Independent Functions of an Independent
Insurance AuthorityInsurance Authority
From From selfself--regulation to regulation to
directdirect regulationregulation
Supervise
intermediaries
(conduct supervision)
Consumer education
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Independence of the Insurance Independence of the Insurance
Authority (IIA) Authority (IIA) -- Aims:Aims:
� For regulatory, operational and financial
independence from the Government
� To replace the Office of the Commission of
Insurance (OCI) & regulate the entire insurance
industry in Hong Kong
� Withdrawal of Self-regulation System in HK
� For better regulation of insurers and
intermediaries
� To enhance policyholder’s protection
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Independence of the Insurance Independence of the Insurance
Authority (IIA)Authority (IIA)
� Levy of 0.1% on insurance premiums for all insurance policies
� IIA the primary and lead regulator of all insurance intermediaries, including banks
� Specific powers delegated to HK Monetary Authority (HKMA) for overseeing banks selling insurance products
� IIA to be set up by 2015
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Independence of the Insurance Independence of the Insurance
Authority (IIA) Authority (IIA) –– industryindustry’’s positions position
� An interactive Focus Group discussion was
organized to gather views of direct insurers,
reinsurers, associations of insurance
intermediaries and the legal profession in
December 2012.
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Independence of the Insurance Independence of the Insurance
Authority (IIA) Authority (IIA) –– Industry positionIndustry position
� On 5 February 2013, HKFI submitted an industry
position paper to the Financial Services and the
Treasury Bureau (FSTB).
� Presenting detailed comments on individual
clauses of the key legislative proposals.
Full version of submission:
http://www.hkfi.org.hk/en_media_20130205.html
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Independence of the Insurance Independence of the Insurance
Authority (IIA) Authority (IIA) –– Industry position
� In essence, the HKFI supports the proposal.
� But a number of areas where the policy
objectives are not that clear.
� The related legislative wordings would require further clarity and refinement.
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Independence of the Insurance Independence of the Insurance
Authority (IIA)Authority (IIA)
Our major concerns on key areas:
1. Regulatory powers on insurance companies
� Necessary to ensure that insurers understand
their regulatory obligations and that any powers will be exercised by the IIA in
accordance with, and subject to, a proper and transparent framework.
� Proposals do not provide sufficient clarity to
the obligations of insurers
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Independence of the Insurance Independence of the Insurance
Authority (IIA)Authority (IIA)
2. Appointment of an Responsible Officer (RO)
� Licensed insurance agents and brokers are required to
appoint a RO who will be responsible for ensuring internal
control and procedures are in place to prevent misconduct
of the insurance intermediaries.
� Every authorized insurer must also appoint a RO and its CEO
will be deemed the RO overseeing the conduct of its
appointed insurance agents.
(our views: too much burden on the CEO to assume the
mandatory duties as RO in an insurance company; suggest
the CEO to delegate and appoint this duty to an
experienced and qualified person as RO for agency
management)
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Independence of the Insurance Independence of the Insurance
Authority (IIA)Authority (IIA)
3. Disciplinary sanctions on insurance intermediaries◦ Present Proposal:
Impose a pecuniary penalty upon insurance intermediaries of up to $10,000,000 or three times the amount of any profit gained or loss avoided as a result of misconduct, whichever is the greater.
� The maximum financial penalty for disciplinary offences by accountants, solicitors and barristers - $500,000;
� medical practitioners - no financial penalty;
� under s. 113C of the Criminal Procedure Ordinance for general criminal offences is a fine of Level 6, being $50,001 to $100,000.
(our views: the penalty is grossly excessive)
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Independence of the Insurance Independence of the Insurance
Authority (IIA)Authority (IIA)
4. Representation at the Governing Board and Industry Advisory Committees
◦ Present proposal:
� 1-2 non-executive directors on the Board of the IIA (Chairman + CEO+ not fewer than 6 directors) will be persons appointed on the basis of their experience in the industry.
(our views: not sufficient representation)
� There will also be two industry advisory committees to advise the Board on long-term business and general business
� No maximum limit on Board membership
(our views: expose the industry to the risk of being vastly under-represented)
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Independence of the Insurance Independence of the Insurance
Authority (IIA)Authority (IIA)
4. Representation at the Governing Board and Industry Advisory Committees (cont’d)
◦ Recommendations
� At least 3 non-executive directors in the Board
of Directors are from the insurance industry (one each from Life, General Insurance and Insurance Intermediary market)
� There should be a representative each from Life and General Insurance industry sector on each committee .
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Independence of the Insurance Independence of the Insurance
Authority (IIA)Authority (IIA)
5. Roles and Functions of the IIA
� Focused primarily on regulating the industry? OR
prefer the future regulator assuming a bigger and wider role as a market enabler, providing impetus
to the healthy growth of the market and
promoting Hong Kong as an insurance/reinsurance centre/captive insurance
hub in Asia?
� Should the IIA be tasked to help attract, train,
develop and retain talents instead of being seen to be introducing new sets of penalties to frighten
approximately 74,200 intermediaries off?
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Independence of the Insurance Independence of the Insurance
Authority (IIA)Authority (IIA)
6. Transitional Arrangement
� Should the government set up a provisional
body of the IIA to ensure a smooth and
seamless transition?
� To preserve the regulatory expertise and experience accumulated by the industry, should
the IIA consider retaining the services of the professionals serving on the “Insurance
Agents Registration Board” under HKFI?
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Independence of the Insurance Independence of the Insurance
Authority (IIA) Authority (IIA) –– Way ForwardWay Forward
� Step up dialogue with our stakeholders including the media and lawmakers to
ensure that the final regulatory framework is sensible and practical.
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2) Risk2) Risk--Based Capital Based Capital
FrameworkFramework
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RiskRisk--based Capital Framework for based Capital Framework for
Insurance Business in HKInsurance Business in HK
� Consultancy study being conducted by KPMG, consultant for the IA
� HKFI has set up Task Forces under its Governing
Committee, GIC and LIC
� Meeting held with KPMG to discuss scope, solvency
capital, measurement of assets and liabilities etc
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RiskRisk--based Capital Framework for based Capital Framework for
Insurance Business in HKInsurance Business in HK
Our major concerns:
� The time frame and possible approach which the Government may have formulated
� Few questions raised for the OCI’s consideration:
◦ if the Government will quickly execute and implement RBC framework as one of top priority areas to be pursued by the IIA right after its establishment in 2015.
◦ Would such an important regulatory requirement be implemented in phases or at one go with very limited preparatory time for insurers?
◦ What would be the likely impact on the Hong Kong insurance market?
◦ Would the demand for additional capital to meet the new solvency ratio trigger rapid market consolidation, cessation of business among small and medium-sized insurers, exit or withdrawal of international players?
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RiskRisk--based Capital Framework for based Capital Framework for
Insurance Business in HKInsurance Business in HK
� The HKFI strongly advise against putting detailed requirements for calculating Insurance Reserves and Risk Based Capital requirements in the primary legislation.
� To provide more flexibility to deal with the launch of new products, would it be more advisable to make these requirements part of the subsidiary legislation instead?
The latest news:
� The insurance commissioner has recently disclosed the Government’s plan to the media that RBC will be implemented in 2016.
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3) Policyholders3) Policyholders’’ Protection Protection
Fund (PPF)Fund (PPF)
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PolicyholdersPolicyholders’’ Protection Fund (PPF)Protection Fund (PPF)
Main objectives:
� Better protecting policyholders’ interest
� Maintaining market stability in the event of
insurer insolvency
� Enhancing public confidence
� Ensuring a fair competitive platform of the
insurance industry
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PolicyholdersPolicyholders’’ Protection Fund (PPF)Protection Fund (PPF)
� IA conducted consultation in 2011 and issued Consultation Conclusions on 30 Jan 2012
� Proposed PPF to be legislated and set up in 2014
� Two schemes to be formed - Life Scheme and Non-life Scheme in PPF
� 100% coverage for the first HK$100,000 of any claim and 80% of the balance up to a total of HK$1M any one claim
� 0.07% levy on applicable premiums, to be collected from insurers
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PolicyholdersPolicyholders’’ Protection Fund (PPF)Protection Fund (PPF)
� HKFI Task Force formed in April 2008
working in close collaborations with OCI
� The industry has serious concerns on four
major issues in Non-life Scheme:
a) Continuity of cover;
b) Inclusion of SMEs;
c) No cap on levies; &
d) Off-shore risks
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PolicyholdersPolicyholders’’ Protection Fund (PPF)Protection Fund (PPF)
Four major concerns in the Non-life Scheme:
1) Continuity of cover for unexpired policies until
policy natural expiry
(our views: violation of liquidation law; all other GI insurers being forced to provide cover of
unexpired policies in an insolvent insurer whereas reinsurance protection is unlikely available;
threat of recurrent natural disaster losses;
domino effect triggering multiple insurer insolvencies, etc.)
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PolicyholdersPolicyholders’’ Protection Fund (PPF)Protection Fund (PPF)
2) The provision of cover to SMEs
(our views: the fund size is too small to
cater for SME segment; complex risks
with long-tail liabilities in SME
business, for example, credit insurance,
product liability, professional
indemnity, marine ocean going hull,
aviation, etc.)
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PolicyholdersPolicyholders’’ Protection Fund (PPF)Protection Fund (PPF)
3) No cap on levies
(our views: without a cap on levies,
unlimited guarantee will be provided
by insurers for PPF)
4) Off-shore risks
(our views: unlimited geographical
limits; unquantifiable exposures to
international risks; exposures to
fraud)
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Q&A