Licensing Approach to Run-Off Insurance Agencies

September 2025

Introduction

In the language of the insurance market, “run-off” refers to a situation when an insurer ceases to underwrite new insurance policies. When this happens, the insurance activities of the insurer become limited to discharging – or running-off – the obligations on its remaining in-force insurance policies.

An insurer may go into full run-off by ceasing to write new insurance policies altogether. More commonly, an insurer may run-off particular portfolios of insurance policies when it exits a specific line of business due to a restructuring or a change in business strategy.

Run-off does not affect an insurer’s legal liabilities under its remaining in-force insurance policies, nor its obligations to service those policies to the same regulatory standards.

An increasingly common way for insurers to manage their run-off portfolios, while maintaining servicing standards, is to engage a specialist run-off insurance agency to manage the portfolios on their behalf. Until recently, specialist run-off insurance agencies have not been as common in Hong Kong as in some other jurisdictions. However, demand for their services in Hong Kong seems to be on upward trend. To support this, we share some pertinent matters the IA will evaluate, when considering a licensing application from a company seeking to operate as a specialist run-off insurance agency.

The value of specialist run-off insurance agencies

When an insurer goes into run-off, its business model undergoes fundamental changes. Business units previously focused on acquiring new business become superfluous, and the priority shifts to maintaining only the essential operations necessary for the insurer to meet its legal and regulatory obligations on the remaining policies in its portfolio. A number of problems can arise from this:

Retaining competent staff in a run-off situation becomes difficult for the insurer, particularly as the size of the remaining portfolio shrinks;
If the insurer is exiting the Hong Kong market altogether, the operation remaining in Hong Kong to perform the run-off, is often de-prioritized by the wider group, with the overseas head-office paying a lower level of attention to the support and resources needed to conduct the run-off;
If a particular portfolio of policies is put into run-off as the insurer exits a line of business, management’s focus can be absorbed on its existing active lines of business with the run-off portfolio being de-prioritized;
The claims handling function in an insurer in run-off, no longer has the natural check and balance that comes with management wanting to maintain the insurer’s claims handling standards as a selling point to drive new business. As a consequence, claims handling standards can be eroded, as costs savings are prioritized over customer-service.

These issues can result in the level of servicing (and particularly claims handling) on policies in a run-off portfolio diminishing and a rising sense of abandonment from the policyholders who feel they are not receiving what their premium has paid for.

Specialist run-off insurance agencies are well placed to help insurers address these issues.

They have staff who are specialists in managing run-off portfolios and have experience in balancing the cost pressures of run-off, against the priority of maintaining servicing standards.
They are accountable to their insurer principals and their reputation for managing portfolios in run-off effectively from both the insurer’s and policyholder’s perspective, is paramount to their acquiring new run-off portfolios to manage going forward. This gives them “skin in the game” to do a good job.
By taking on portfolios from different insurers, they are able to build sufficient scale to make their delivery of service efficient and effective.
Since managing run-off portfolios is their core business, they can invest in technology solutions and systems to ensure service to policyholders is maintained.

The competitive nature of the insurance market in Hong Kong means that business strategies are constantly adapting. It is not uncommon for insurers to exit certain lines of business or cease underwriting particular insurance products in favour of introducing new or updated insurance products.

When this happens, how the run-off of the exited portfolio of policies is managed and resourced is an important consideration. Run-off, after all, is not a short-term situation. Long term insurance policies, as their name suggests, are in force for multiple years. Certain general business policies also come with a long-tail. As a result, a run-off can take many years to complete and it is important that insurers adequately manage and resource a run-off over its full duration. Breaches of regulatory requirements during run-off are just as liable to punishment by the IA, as breaches by insurers continuing to write new business.

It is to address these potential problems, that one can see a place for specialist run-off insurance agencies in the Hong Kong insurance market.

Regulatory Considerations

A company looking to establish itself as a specialist run-off insurance agency would need to address two main aspects of the insurance regulatory framework: (1) the licence it needs to obtain; and (2) the outsourcing criteria that need to be satisfied for it to take on the management of run-off portfolios.

(1) Licensing

In order to manage run-off portfolios as a specialist run-off agency on behalf of insurers, the agency would need to become licensed by the IA as a licensed insurance agency. The applicant would have to satisfy the IA that it meets the criteria applicable in section 64U of the Insurance Ordinance (“IO”), which focus on its fitness and properness to carry on regulated activities in the lines of business concerned, and also the fitness and properness of its proposed responsible officer (“RO”).

These matters are evaluated in the context of the specific agency’s anticipated business. For traditional insurance agencies, the evaluation would therefore focus on its sales activities. By contrast, for an applicant looking to operate as a specialist run-off insurance agency (and its RO), the IA would focus on the following:

Governance, controls and authorities from the insurer principals - The IA would evaluate the adequacy of the agency’s governance and controls for servicing the in-force policies the agency would be managing. Particular attention would be paid to the levels of authority the agency would have from the insurer to pay out claims and benefits under policies, and the checks and balances imposed on the operation of such authorities by the insurer. These authorities would need to be operated in a way that does not cause undue delay in payments to policyholders. The contract between the agency and its insurer principal would have to be submitted to the IA as part of the licensing application, so that the authorities of the agency can be understood, along with the controls of the insurer on the agency, and the rights of the agency to obtain instructions from the insurer when needed. The IA would critically examine any potential areas of friction in communication between the insurer and the agency, and between the agency and the policyholder, that could result in prejudice to policyholders.
Remuneration model for the agency - The remuneration model of the agency would be looked at to understand if this created any misalignment between the agency and interests of the policyholders receiving adequate servicing levels on their policies.
System adequacy - If the agency intends to manage the run-off of portfolios through its own system, focus would be placed on system readiness and its technical safeguards. The applicant agency will need to provide a due diligence report regarding its system and technology, demonstrating the level of readiness and security of its system and technology, and that it has expertise on its staff to operate the business model. In addition, the applicant agency would be required to demonstrate that there are adequate and effective procedures and controls to ensure data protection and manage (and particularly mitigate) cyber risk.
Relevant experience of the RO candidate – The IA would assess the experience of the RO in terms of relevancy to the core run-off activities of the agency. For example, if the run-off agency was going to have claims handling authority, an obvious matter to consider would be the RO candidate’s previous experience of claims handling. In other words the IA will need to be satisfied that the candidate possesses appropriate ability, skills, knowledge and experience commensurate with the nature and scale of business of the run-off insurance agency.

(2) Outsourcing

The IA’s Guideline on Outsourcing (“GL14”) would also likely apply to the operation of the run-off insurance agency. In GL14, “outsourcing” refers to an arrangement under which a service provider undertakes to perform a business activity, function or process which would otherwise be undertaken by the insurer itself. When an insurer appoints a run-off insurance agency to manage a portfolio of insurance policies on its behalf, it is essentially outsourcing to the agency, policy administration functions and (depending on the authorities given to the agency) its claims handling functions. These are services the insurer would otherwise be performing.

GL14 would require an insurer, when engaging a run-off agency, to carry out a risk assessment and due diligence on the agency, ensure that the contract with the agency contains certain rights and obligations, ensure all laws on client confidentiality are complied with, implement ongoing monitoring controls on the agency, and establish a contingency plan to ensure business continuity if the run-off agency’s service is interrupted.

As part of the licensing application for the agency licence, the applicant agency would have to show that it has been appointed by at least one insurer. For this to happen, the insurer would need to have gone through the processes in GL14 to make the appointment. Much of the information generated from the GL14 process would also be relevant to the licensing application. For example:

The due diligence report by the insurer on the agency as part of the GL14 process (and particularly the insurer’s scrutiny of the agency’s systems) would be useful for the IA’s consideration of the agency’s licensing application.
The contract between the insurer and the agency would also be examined as part of the licensing application.
Particular focus would also be placed, in the licensing application, on the contingency plan that the insurer is required to put in place for the purposes of GL14, if the agency stopped its agency business. How would continuity of service to policyholders be provided in these circumstances? By way of the insurer taking back the portfolio to manage, or transferring its management to another run-off agency? These questions would need to be addressed.

A high degree of cooperation between the insurer and agency would thereby assist not only in satisfying the outsourcing requirements in GL14, but also in facilitating the agency’s licensing process.

Other considerations pertinent to specialist run-off insurance agencies

There are two other specific issues that the IA has turned its conduct mind to, when it comes to considering the place that specialist run-off insurance agencies can play in the Hong Kong insurance market.

Maximum number of principal insurers - The first issue concerns the Insurance (Maximum Number of Authorized Insurers) Rules (Cap. 41K) (“Maximum Principal Rules”) which limits a licensed insurance agency to being appointed by no more than 4 authorized insurers, of which no more than 2 can be insurers authorized to carry on long term business. As part of the agency licence application, the candidate agency’s business plan would be scrutinized for its feasibility. The business plan would have to be feasible in the context of the agency only being able to manage the run-off portfolios of the limited number of insurer principals for which it could act in accordance with the Maximum Principal Rules.

Once licensed – and after its business model has proven to be successful in its operation – a run-off insurance agency may eventually find itself managing portfolios on behalf of the maximum 4 insurers permitted under the Maximum Principal Rules. If approached by a 5th insurer to take on another run-off portfolio, the agency would be unable to proceed due to these regulatory limits.

The Maximum Principal Rules can, therefore, be a limiting factor on a run-off insurance agency’s ability to scale its business model. This in turn could inhibit investment and efficiency gains that could translate into better service for policyholders in the run-off portfolios it is managing. This may be one of the few situations where the IA could consider exercising its discretion under section 79 of the IO to exempt the run-off insurance agency from the limitation imposed in the Maximum Principal Rules to allow it to represent the 5th (and may be more) insurer principals, given the benefits to policyholders this would bring. Such exemption would need to be applied for at the time the 5th principal appointment is being considered. When evaluating whether or not to exercise its discretion under section 79 of the IO, the IA will take into account criteria which focus on policyholder protection namely:

whether granting the exemption would strengthen policyholder protection;
whether the regulatory requirements in place on the run-off agency (notwithstanding the exemption) would be sufficient to continue to protect policyholders;
whether granting the exemption would create any unfairness in the insurance market; and
whether there are advantages to policyholders in granting the exemption (e.g. would it enable the servicing of insurance needs currently not being met in the market?).

Finding practical solutions on market issues – Another area where the IA sees specialist run-off insurance agencies adding value to the insurance market, is in finding practical solutions to bringing finality to a run-off, particularly for long term business portfolios.

One of the practical problems of handling run-offs is keeping in contact with policyholders. Run off insurance agencies – because run-off is their core business – are better positioned to do this than an insurer which has exited the Hong Kong insurance market and has left behind a limited footprint to maintain its authorization to run-off its remaining policies without any assistance.

By keeping communication open with a policyholder and keeping updated on the policyholder’s circumstances (and contact details), the run-off insurance agency (on behalf of the insurer) can know with certainty when all the obligations of the insurer under the policy have been fulfilled. When all obligations under all policies have been discharged, the run-off can then be brought to an end and the insurer can then apply to withdraw its authorization and close its operation.

Life, however, (as the saying goes), is never this perfect. There will always likely be some policyholders who do not keep their contact details up to date (despite reminders from the run-off insurance agency) and hence with whom all contact will be lost. There may come a time when, based on the policyholder’s age, it can be assumed the insurer would owe payment of a death benefit due under the policy. But if the insurer (or the run-off agency representing it) cannot find the policyholder, how can the run-off ever be fully discharged?

This raises the question as to what steps an insurer (or the run-off insurance agency representing it) can take to exhaust all avenues to find its remaining few policyholders/their beneficiaries and be in a position to declare the run-off finally over. Specialist run-off insurance agencies will be well placed to develop best practice processes for this which it may borrow from their experience in other jurisdictions. These practices may benefit the insurance market in Hong Kong in addressing the problem of bringing run-offs to a final end. For example, a combination of extensive advertising and then placing monies on trust or into court (for the remaining uncontacted policyholders or beneficiaries should they or their representatives ever come forward) may be something to assess as a potential solution. This is certainly a matter worth considering further and the practical experience that specialist run-off insurance agencies can bring to the market could assist with this.

Conclusion

Specialist run-off insurance agencies do have a role to play in assisting insurers managing legacy liabilities effectively, efficiently and in a way that continues to treat policyholders fairly. In doing this, they can facilitate restructurings of operations, manage market exits and changes in business strategies in ways that uphold policyholder interests. This, in turn, would reinforce stability in the insurance market by ensuring that run-offs of portfolios – an important part of the insurance business life-cycle - are properly resourced and managed.

The growing presence of specialist run-off insurance agencies in the Hong Kong insurance market is therefore a welcome development and a sign of the market’s continued maturity. We hope this article provides assistance to those seeking to set up business as specialist run-off insurance agencies in Hong Kong.