Understanding the Risks of Offshore Coverage and the Importance of Broker Disclosure

September 2025

If an insurer carries on any class of insurance business in or from Hong Kong, it must be authorized under the Insurance Ordinance (“IO”) and become an authorized insurer. This requirement is the foundation of the Hong Kong insurance regulatory framework, which requires insurers – once authorized - to subject themselves to the capital, solvency, conduct and related governance and risk management requirements imposed by the IO and related subsidiary legislations, Guidelines and Codes. These requirements serve to protect the interests of policyholders and promote stability across the insurance market.

Authorized insurers serving policyholders in other jurisdictions

Authorized insurers – being part the international finance centre that Hong Kong is – serve policyholders not only domestically in Hong Kong, but also across the world. In doing so, authorized insurers in Hong Kong are obliged to ensure that when servicing policyholders in other jurisdictions, they do nothing to infringe the laws and regulations that apply in those other jurisdictions.

Hong Kong policyholders buying insurance from insurers in other jurisdictions – the need to advise on the limitations and risks

Given the strength and depth of the Hong Kong insurance market, policyholders can typically obtain appropriate coverage they need from authorized insurers in Hong Kong. However, in rare cases, some policyholders may still choose to obtain their insurance from insurers in jurisdictions outside Hong Kong which are not authorized insurers (sometimes referred to as obtaining insurance “offshore”). Where such occasions do arise, the offshore insurer would need to ensure that it does nothing to infringe the laws in Hong Kong in the course of providing such insurance. In particular, the offshore insurer must limit its activities, so that it does not “carry on insurance business in or from Hong Kong” without being authorized under the IO.

Where consideration is being given to acquiring insurance from an offshore insurer, it is imperative that the policyholder is made aware of the associated limitations and risks that come with buying insurance from an offshore insurer. Providing that advice – so that the policyholder can make a fully informed decision taking into account such matters - is often the task of the licensed insurance broker company representing and advising the policyholder.

Ensuring that the policyholder is properly and adequately advised in these situations, is a core part of the regulated activities that a licensed insurance broker company carries on. A licensed insurance broker company (unlike an offshore insurer) will be answerable to the IA for this and for complying with the relevant provisions in the Code of Conduct for Licensed Insurance Brokers (“Code of Conduct”) that apply.

Circumstances where offshore insurance options may be appropriate to consider

A licensed insurance broker company is duty-bound to act in the best interests of the clients – the policyholders and potential policy holders – it represents. As part of this duty, Standard and Practice 2.2 of the Code of Conduct requires a broker company to recommend insurance products which best meet its client’s circumstances. For these purposes, the licensed insurance broker company must source a sufficient range of available insurance products, suitable to the client’s circumstances, from a sufficient range of different insurers before recommending an insurance product to the client.

A licensed insurance broker company will usually be well positioned to discharge these duties by sourcing a range of insurance options for the client from the 150+ authorized insurers in Hong Kong. The occasions where it needs to source an offshore insurance option, would and should be relatively limited, particularly in the mass retail market. Indeed, for compulsory insurance policies (for example employee’s compensation insurance and motor third party liability insurance), these coverages must be sourced only from authorized insurers in Hong Kong.

However, in certain lines of business, where a licensed insurance broker company will be faced with a situation where it needs to consider options from offshore insurers in order to fulfil its duties. For example, this may arise where the capacity in the Hong Kong insurance market is insufficient to handle the size of a risk, where a niche line of insurance coverage is required which is more developed or readily available in another jurisdiction, or where offshore insurers can offer more competitive product features that better suit the policyholder’s circumstances. In these situations, in order to source a sufficient range of insurance options from a sufficient number of insurers, the licensed insurance broker company may need to look offshore to fulfil its duties to its client.

Limitations and risks on offshore insurance

Another core duty of a licensed insurance broker company when advising a client, is to provide accurate and adequate information so as to enable the client to make an informed decision. Where offshore insurance is one of the options being considered, to discharge this duty, the licensed insurance broker company would need to advise the client fully on the limitations and risks associated with this option.

According to Standard and Practice 5.2 (c) of the Code of Conduct, where an insurance policy option from an offshore insurer is to be presented, the licensed insurance broker company must, at minimum, disclose to the client:

(i) the name and address of the insurer in the jurisdiction where the insurer has issued the policy and (if different) the jurisdiction where the insurer is incorporated;

(ii) the fact that the offshore insurer is not regulated by the IA and is subject to different laws and regulations;

(iii) the financial standing of the offshore insurer (for example, whether the insurer has a credit rating and, if so, what the credit rating is); and

(iv) the governing law of the insurance policy and the jurisdiction in which disputes under the policy will be determined.

Further, where the client is an individual, the insurance broker should also obtain written acknowledgement from the client of the disclosures in (i) to (iv) above and keep a proper record of such acknowledgement.

Under Standard and Practice 5.2(a) of the Code of Conduct, a licensed insurance broker should provide its client with all relevant information on the key features of each insurance product recommended or arranged by the broker. Applying this principle in the context of arranging an offshore insurance option, the broker is expected to provide the client with adequate information on the limitations and risks associated with purchasing insurance from an offshore insurer so as to ensure that the client is in a position to make an informed decision. For these purposes, the broker company would, in our view, need to advise the policyholder on the following, at minimum:

Risks associated with claims handling and payment - The limitations to which the offshore insurer would be subject, in having to handle and adjust claims under the insurance policy without “carrying on insurance business in or from Hong Kong” would have to be drawn to the client’s attention. The way in which these limitations could adversely affect the policyholder in terms of timing and adjustment of claims payment would need to be highlighted.
Foreign exchange risk - Foreign exchange risk may have to be considered, particularly if the policy limits and excess are denominated in a different currency from the loss (based on where the loss is likely to take place). Fluctuations in currency could impact the recoverable loss amount under the policy. Further, if the offshore insurer is in a jurisdiction subject to capital controls, this may add another layer of administrative process that the policyholder would need to navigate in order to receive payment (which could involve considerable delay in the settlement of claims).
Legal and Regulatory risk – In addition to disclosing that the offshore insurer is subject to a different legal and regulatory regime from that in Hong Kong, consideration may also need to be given to any material differences between the respective regimes as they apply to insurers and how these impact the level of customer protection available to the policyholder. Furthermore, policy interpretations and legal dispute resolution processes may vary, particularly where the policy is governed by foreign laws or where disputes are handled outside Hong Kong. These differences may introduce complexities or delays in claim settlements, as well as result in increased legal costs and longer timelines for resolution.
Tax risk - Offshore insurance may also give rise to tax implications under the laws of the foreign jurisdiction. Depending on the applicable tax regulations, policyholders may be subject to taxes on, for example, policy returns or claim benefits. These tax obligations may not be immediately apparent at the time of application, but failure to comply with relevant tax laws at the later stage of the policy could result in adverse consequences. As such, it is important for policyholders to carefully consider any potential tax exposures before entering into offshore insurance policies.
Political risk - Political risk may also be a consideration. International relations between countries and jurisdictions are subject to different twists and turns. This can impact the ability of businesses to meet their obligations under contracts to clients in other jurisdictions.
Solvency risk - The financial standing of the offshore insurer is part of the minimum information that needs to be given, but the broker company would need to ensure that this is presented in a way that is clear and understandable. If the offshore insurer holds only a domestic credit rating (rather than an international one), this would certainly need to be drawn to the client’s attention. Where appropriate, the broker would also need to explain the implications of the difference (particularly if the client is not familiar with such matters) and provide a comparison with the financial standing of the authorized insurers offering alternative insurance options in Hong Kong.

Suitability Assessment and Documenting the regulated advice given

Under Standard and Practice 6.1 of the Code of Conduct, a licensed insurance broker is required to carry out an appropriate suitability assessment in relation to the client’s circumstances before providing any regulated advice. The purpose of such suitability assessment is to ensure that the broker obtains sufficient information about the client’s circumstances on which to base its regulated advice to the client.

If, after conducting a suitability assessment, the broker determines that the limitations and risks associated with an offshore insurance policy render it unsuitable to the client, the broker should not recommend such a product to the client. However, if the client insists on proceeding with an option from any offshore insurer despite the broker’s recommendation, the broker, in accordance with Standard and Practice 6.2 of the Code of Conduct, is required to document and keep a proper record of:

the recommendation made by the broker to the client;
the reasons provided by the client (if any) to the broker for taking a decision which does not follow the recommendation;
the explanation given by the broker to the client for considering the client’s decision to be unsuitable; and
the fact that the decision is the client’s own decision.

This documented record of the regulated advice given would be the type of information looked at by the IA in an inspection, to ensure that all risks have been advised on.

Due diligence obligations and competence to advise

The governance requirements in Section IX of the Code of Conduct expect a licensed insurance broker company to have in place processes to perform adequate due diligence on both the insurers with which they would consider placing business and their products. If a licensed insurance broker company were to include an option from an offshore insurer in its presentation to a client, it would need to have performed requisite due diligence on both the insurer and the policy option, taking account of the limitations and risks mentioned.

If a licensed insurance broker company finds itself unable to do this or not in a position to advise on issues associated with placing insurance with a particular offshore insurer, then it needs to be cognizant of the conduct requirement in Section 90(c) of the IO, which requires that a broker company only advise on matters for which it is competent to advise. As such, if the licensed insurance broker company finds itself unable to advise adequately on the limitations and risks associated with placing business with an offshore insurer, it should not be including this as one of the options presented to a client and, if this means the broker company is unable to serve the client properly, it should inform the client up front about this.

Conclusion

As at 31 March 2025, there are 157 authorized insurers¹ in Hong Kong (84 general insurers, 51 long term insurers, 19 composite insurers and 3 special purpose insurers) which give the Hong Kong market the range and depth to handle almost any risk. As such, the need for a licensed insurance broker company to look overseas to fulfill its core duty of sourcing suitable insurance should generally be infrequent. That said, it is recognized that in certain lines of business (e.g. specialized commercial risks) suitable products may not be available locally. In these cases, sourcing offshore insurance is not inappropriate, provided it is done in the client’s best interests and with proper due diligence.

Nonetheless, when arranging an offshore insurance policy, it is essential that the insurance broker clearly explains the limitations and risks involved so that the client can make an informed decision. Failure to properly discharge this duty of care may not only result in poor client outcomes but could also have serious regulatory consequences. A breach of the broker’s obligations under the Code of Conduct will give rise to fitness and properness concerns, and could also lead to disciplinary action by the IA. It is therefore imperative that broker companies establish and follow a robust process when recommending offshore insurance options.

Notes:

¹ https://www.ia.org.hk/en/infocenter/statistics/2 market.html