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.
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 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.
According to section 13AA of the IO and the Insurance (Valuation and Capital) Rules (Cap. 41R) ("Valuation and Capital Rules"), an insurer (except marine insurers, captive insurers, special purpose insurers and Lloyd's) must ensure at all times that its capital base is not less than each of its prescribed capital amount ("PCA"), its minimum capital amount ("MCA") and HK$20 million.
Capitals are classified into tiers according to the quality. The capital base is the sum of Unlimited Tier 1 capital, Limited Tier 1 capital and Tier 2 capital.
In the determination of PCA, market risk, life insurance risk, general insurance risk, counterparty default and other risk, and operational risks are included in accordance with Part 5 of the Valuation and Capital Rules.
Insurers are required to value their assets and liabilities, including insurance liabilities, in accordance with Part 4 of Insurance (Valuation and Capital) Rules ("Valuation and Capital Rules") . In essence, the valuation basis is on market consistent basis.
For applicant company, the IO requires that any person who is a director or controller of an insurer must be “fit and proper” to hold such position. 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.
After obtaining authorization, an authorized insurer is required to comply with sections 13A, 13AC, 13AE, 13B, 14 and 15AAAB of the IO in respect of any appointment, cessation of appointment of or changes in particulars of its controllers, directors, key persons in control functions, shareholder controllers or actuaries. 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, shareholder controllers or actuaries of an insurer are fit and proper.
To enhance transparency of this regulatory requirement, a Guideline on “Fit and Proper” Criteria in relation to Authorized Insurers under the Insurance Ordinance (Cap.41) (“GL4”) was issued by the IA. GL4 sets out those factors that the IA will take into account in administering the said requirement.
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.
An insurer applying for authorization must meet certain other criteria as set out in the Guideline on Application for Authorization to Carry on Insurance Business in or from Hong Kong (GL5) 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 criteria continue to apply to an insurer after its authorization. Unless otherwise specified, the requirements and criteria set forth in GL5 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.
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.
Section 25A of the Insurance Ordinance (Cap.41) and the Insurance (Maintenance of Assets in Hong Kong) Rules (Cap. 41T) requires an insurer carrying on general business, other than an HK insurer, a designated insurer and a captive insurer, to maintain assets in Hong Kong in respect of its general insurance business with onshore risk. 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.
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.
Insurance (Submission of Statements, Reports and Information) Rules (Cap. 41S) prescribe the information that insurers must submit to the IA, and the deadlines, frequency and methods of submission. The Rules also specify the requirements for submitting financial statements (prepared under generally accepted accounting principles), regulatory returns (prepared under the statutory basis), auditor's reports on the regulatory returns and reports on actuarial investigations or reviews.