Regulation of Insurers and Lloyd’s
Section 6 of the Insurance Ordinance (Cap. 41) (“IO”) prohibits any person from carrying on insurance business in or from Hong Kong except an authorized insurer, Lloyd’s or an association of underwriters approved by the Insurance Authority (“IA”). The IA regulates these entities through its licensing and supervision functions.
Regulatory Requirements on InsurersAuthorized insurers have to comply with the provisions of the which, among other things, require them the following:
Any company wishing to carry on insurance business in or from Hong Kong may apply to the Insurance Authority for authorization to do so under the IO.
A “company” for the purposes of the IO is one formed and registered under the Companies Ordinance (Cap. 622), or one formed and registered under the former Companies Ordinance, including a non-Hong Kong company to which Part 16 of the Companies Ordinance (Cap. 622) applies.
Authorization requirements and procedures are set out in the Authorization Guideline (GL1) and Guideline on Application for Authorization to Carry on Insurance Business in or from Hong Kong (GL5). Authorization to carry on insurance business in or from Hong Kong will only be granted to those insurers who meet the authorization requirements stipulated under sections 8(2) and 8(3) of the IO.
The minimum paid-up capital is currently HK$10 million, or HK$20 million for a composite insurer (i.e. carrying on both general and long term business) or for an insurer wishing to carry on statutory classes of insurance business. It should be emphasized that these are the minimum amounts and an appropriate safety margin is required on top of the required capital.
An insurer shall maintain an excess of assets over liabilities of not less than a required solvency margin. The objective is to provide a reasonable safeguard against the risk that the insurer’s assets may be inadequate to meet its liabilities arising from unpredictable events, such as adverse fluctuations in its operating result or the value of its assets and liabilities.
There are separate provisions for a general business insurer and a long term business insurer:
General Business Insurer
The solvency margin is the greater of :
- one-fifth of the relevant premium income up to HK$200 million, plus one-tenth of the amount by which the relevant premium income exceeds HK$200 million; or
- one-fifth of the relevant claims outstanding up to HK$200 million, plus one-tenth of the amount by which the relevant claims outstanding exceeds HK$200 million.
subject to a minimum of HK$10 million, or HK$20 million in the case of insurers carrying on statutory classes of insurance business.
Long Term Business Insurer
The solvency margin is determined by the greater of :
- HK$2 million; or
- an amount specified under the Insurance (Margin of Solvency) Rules (which is generally 4% of the mathematical reserves and 0.3% of the capital at risk).
For the purposes of determining compliance with the solvency margin requirement, the value of assets, in the case of an insurer carrying on general business, is to be determined in accordance with the Insurance (General Business) (Valuation) Rules, while the amount of the long term business liabilities, in the case of an insurer carrying on long term business, is subject to the Insurance (Determination of Long Term Liabilities) Rules.
Fit and Proper Management and Shareholders
The IO requires that any person who is a director or controller of an insurer must be “fit and proper” to hold such position. Prior approval of the IA is required under sections 13A or 13B for the appointment of certain controllers, including the chief executive of an insurer. In applying the fit and proper test, the IA will take into account, among other things, the character, qualifications and experience of the directors or controllers of the applicant company.
To enhance transparency of this regulatory requirement, a Guideline on “Fit and Proper” Criteria under the Insurance Ordinance (Cap.41) (“GL4”) was issued by the IA for information. GL4 sets out those factors that the IA will take into account in administering the said requirement.
After obtaining authorization, an authorized insurer is required to comply with sections 13A, 13AC, 13AE, 13B, 14 and 15 of the IO in respect of any appointment of or changes in its controllers, directors, key persons in control functions or appointed actuary (if the insurer carries on long term insurance business). These requirements aim at ensuring that the persons to be appointed or have been appointed, as appropriate, as controllers, directors, key persons in control functions or appointed actuary of an insurer are fit and proper.
Adequate Reinsurance Arrangements
The IO requires that adequate arrangements are in force, or will be made, for the reinsurance of risks of those classes of insurance which are to be carried on by the insurer. The IA has issued a Guideline on Reinsurance (GL17) which sets out the general guiding principles of the IA in assessing the adequacy of the reinsurance arrangements of an insurer.
Besides, an insurer applying for authorization must meet certain other conditions as set out in the Authorization Guideline (GL1) (the “Guideline”) issued by the IA, which seek to ensure that the applicant insurer is financially sound and competent to provide an adequate level of services to the insuring public. These conditions continue to apply to an insurer after its authorization. The requirements set forth in Item 3.5 of the Guideline apply to all applicants, whether incorporated locally or overseas, which include, amongst others, the commitment of the applicant to Hong Kong. The applicant is expected to have an office in Hong Kong with a professional management and staff establishment appropriate to the nature and scale of its operations, and its own senior management team, comprising a locally-based chief executive and adequate team heads to oversee its key functions. A company applying for authorization to carry on long term insurance business in or from Hong Kong must also meet the requirements set forth in Item 3.6 of the Guideline. An applicant which is a non-Hong Kong company must further meet the requirements set forth in Item 3.7 of the Guideline. However, an overseas applicant may, if it so chooses, incorporate a subsidiary company in Hong Kong for the purpose of the application, in which event the additional requirements set forth in Item 3.7 of the Guideline will not apply.
Facility for Terrorism Risks
Employees’ Compensation (“EC”) Insurance Business
To resolve the problem of withdrawal of reinsurance coverage for terrorism risks in EC business following the 911 attacks on the United States, the Government of the Hong Kong Special Administrative Region (the “Government”) has since January 2002 provided direct EC insurers with a facility of up to HK$10 billion in aggregate to cover claims arising out of terrorism under their EC insurance policies (“Facility”). Participation in the Facility is voluntary. Participating insurers are required to pay a monthly charge of 3% on the gross premiums written for the month of their EC policies to the Government. With this Facility, insurers can continue to provide cover for employment-related claims for death and bodily injuries caused by terrorist acts and the protection of both employers and employees can be maintained.
The Government has no intention to assume the role of a reinsurer and has made it clear that it will withdraw the Facility once the reinsurance cover for terrorism risks become available again from the commercial market. In this regard, the Insurance Authority is closely monitoring market developments.
Motor Insurance Business
To resolve similar problem faced by direct motor insurers, the Motor Insurers’ Bureau of Hong Kong, which consists of all insurers carrying on direct motor vehicle liability insurance in Hong Kong, has since January 2002 provided a facility of up to HK$200 million through its First Fund to satisfy third party death or bodily injury claims arising from terrorist acts under motor policies.
Adequate assets maintained in Hong Kong for general business
Section 25A of the Insurance Ordinance (Cap.41) requires an insurer carrying on general business, other than a professional reinsurer and a captive insurer, to maintain assets in Hong Kong of an amount which is not less than the aggregate of 80% of its net liabilities and the solvency margin applicable to its Hong Kong general business. The objective is to ensure that, in the event of insolvency of an insurer, assets will be available in Hong Kong to meet the claims of Hong Kong policy holders. These claims are accorded a preferential status under Hong Kong’s insolvency law to those of ordinary creditors.
Prudent Valuation Basis for Assets and Liabilities
General insurance business
The Insurance (General Business) (Valuation) Rules (“Valuation Rules”) made under section 129(1) of the Insurance Ordinance (Cap.41) provide a standard and prudent basis for the valuation of the assets and liabilities of an insurer carrying on general business. The Valuation Rules prescribe the valuation methods for different types of assets commonly found in an insurer’s balance sheet. To ensure a prudent spread of investments, the Valuation Rules also stipulate admissibility limits for different categories of assets. The admissibility limits, however, do not apply to assets maintained in Hong Kong pursuant to the local asset requirement.
Long term insurance business
The Insurance (Determination of Long Term Liabilities) Rules made under section 129(1) of the Insurance Ordinance (Cap.41) set out the bases for the determination of the amount of long term business liabilities. An insurer is required to adopt prudent provisions and assumptions, particularly on the rate of interest, when valuing the amount of long term business liabilities. Among others, valuation methods are specified for calculating the yields on assets and the amount of future premiums payable under an insurance contract.
Section 17 of the Insurance Ordinance (Cap.41) (“IO”) provides that an insurer is required to submit annually to the IA its financial statements prepared in accordance with the requirements of Schedule 3 to the IO.
An insurer carrying on general business is additionally required to submit annually to the IA an audited General Business Return and audited Statement of Assets and Liabilities pertaining to its Hong Kong general business. The latter requirement does not apply to a professional reinsurer or a captive insurer.
An insurer carrying on long term business is required to submit annually an actuarial investigation report and the Hong Kong Long Term Business Return to the IA.
The IA has issued a Guideline on Corporate Governance of Authorized Insurers (“GL10”) which sets out the minimum standard of corporate governance that is expected of authorized insurers.
Corporate governance refers to systems through which an authorized insurer is managed and controlled. It is also a system of “checks and balances”. The IA requires insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of its business and adequately recognizes and protects the interests of policy holders. Also, the IA requires insurers to have, as part of their overall corporate governance framework, effective systems of risk management and internal controls, including effective functions for risk management, compliance, actuarial matters and internal audit.