Hong Kong: Regulatory Minefield: Exploring The New Hong Kong Insurance Regulatory Landscape

According to the Legislative Council brief issued on 19 April 2017 by the Financial Services and the Treasury Bureau and the Provisional Insurance Authority, 26 June 2017 is the commencement date for the next phase of changes to Hong Kong's insurance regulatory framework. As with any journey, preparation is crucial, so this bulletin explores some of the key changes and their potential impact on insurers in the Hong Kong market.

Further changes to the Insurance Companies Ordinance (Cap.41) (ICO)

Although the Insurance Companies (Amendment) Ordinance 2015 (Amendment Ordinance) was enacted in July 2015, it was designed to commence in stages, with the first stage coming into force in December 2015. On 26 June, the second phase will commence bringing into operation over 100 amendments to the ICO. Some of the most significant of these are highlighted below.

Enhanced regulatory, investigatory and enforcement powers

The Provisional Insurance Authority, established under the first phase of amendments, will become the independent Insurance Authority (IIA). The IIA will take over the regulatory functions of the Office of the Commissioner of Insurance (OCI) and the OCI will cease to exist. The ICO will be renamed the "Insurance Ordinance" (IO) and provisions that come into operation on 26 June will significantly widen and enhance the scope of the IIA's regulatory, investigatory and enforcement powers.

The IO will empower the IIA to appoint inspectors to conduct inspections to ascertain whether an authorised insurer is complying with the IO or any condition of authorisation to carry on insurance business in Hong Kong. At any reasonable time and without a warrant, an inspector may enter the premises of an authorised insurer and make copies of business records.

Where the IIA has reasonable cause to believe there has been a breach of the IO or a person has carried on insurance business in a manner that is not in the interests of the policyholders or the public, the IIA may appoint an investigator to conduct an investigation. The investigator may require a relevant person to produce any document related to the investigation in the person's possession and require the relevant person to give an explanation in respect of such document or answer a question relating to any matter under investigation.

In the event that the IIA conducts an inspection or investigation on the authorised insurer or its employees, the employees of the insurer should fully cooperate with, and provide all necessary assistance to, the inspector or investigator. A person commits an offence if he, without reasonable excuse, fails to comply with a requirement imposed by an inspector or investigator and may be liable to a maximum fine of HKD200,000 and imprisonment of up to one year.

Additionally, magistrates are empowered to issue a warrant authorising a person (such as an inspector or investigator) to enter the authorised insurer's premises, and to search for, seize and remove a record or document relevant to the inspection or investigation. If the authorised insurer is found guilty of any misconduct, including a breach of the IO, the IIA may revoke or suspend the authorisation of the insurer to carry on insurance business.

It remains to be seen how the IIA will use its regulatory, investigatory and enforcement powers in practice. Further guidance is needed on certain aspects, for example, what constitutes reasonable cause for the IIA to launch an investigation.

Insurers should have sufficient and adequate internal controls in place to ensure that the insurer fully complies with the IO and other relevant rules and regulations in order to minimise the risk of the insurer being the subject of any IIA investigation or disciplinary action.

Insurers should also review their internal manuals in relation to handling regulatory inspections/investigations and provide the appropriate training to employees. This is to ensure that if an inspection or investigation does occur, the insurer and its employees will be ready to provide all necessary assistance and address the IIA's concerns without jeopardising the insurer's interests.

Enhanced corporate governance

Amendments coming into operation on 26 June will also require enhanced corporate governance within authorised insurers. The concept of "control functions" will be introduced: functions that are likely to enable the individual responsible for the performance of the function(s) to exercise a significant influence on the business. Control functions include risk management, financial control, compliance, internal audit and actuarial functions. The Financial Secretary may specify others by notice.

The revised IO will provide that appointments by authorised insurers of certain controllers, directors, key persons in control functions, and appointed actuaries of long term insurers will require the IIA's prior approval, a pre-condition of which is that the IIA has to be satisfied of the proposed appointee's fitness and probity. The IO codifies the 'fit and proper' criteria, which we anticipate will be supplemented by regulatory guidelines.

Under the new Section 14A of the IO, in determining whether a person is fit and proper, the IIA must have regard to the person's education; qualifications; ability to act competently, honestly and fairly; reputation, character, reliability and integrity; financial status; and whether any disciplinary action has been taken against the person by any authority or regulatory organisation in Hong Kong or elsewhere.

This is a significant development, since not only are the minimum fitness and probity requirements codified in legislation, authorised insurers will also need to seek the IIA's approval prior to appointing directors, appointed actuaries (of life insurers), key persons in control functions, and additional controllers. Insurers will need to implement procedures and controls in terms of personnel selection for the various roles having regard to these requirements.

However, it is unclear if persons already in the position of key persons in control functions before the commencement of the second phase of amendments will have to be approved by the IIA and, if so, when. The legislation does not contain an express grandfathering provision. We anticipate that the IA will release further guidance on this issue in the future.

(For further details regarding corporate governance of authorised insurers, please see our analysis on the recently-revised Guidance Note on the Corporate Governance of Authorised Insurers (GN10) here.)

What about changes affecting insurance intermediaries?

The second phase of amendments will not effect the overhaul of the way in which insurance intermediaries are licensed and regulated. This will take place in approximately two years' time. According to the Hong Kong Government press release (please click here for further details), this arrangement allows "time for the [IIA] to prepare the necessary tools, such as guidelines on conduct, for regulating insurance intermediaries".

At present, insurance agents and brokers are regulated by self-regulating professional bodies. The Amendment Ordinance will amend this by introducing a statutory insurance intermediary licensing regime, empowering the IIA to directly license and supervise all insurance intermediaries in Hong Kong, and introducing new conduct requirements for them. When the relevant provisions of the Amendment Ordinance come into operation, any person who carries on a regulated activity in the course of the person's business or employment or for reward will require a licence.

The definition of "regulated activity" under the revised IO will be broad and will extend beyond negotiating or arranging a contract of insurance to include, "inviting or inducing, or attempting to invite or induce, a person to make a material decision" or enter into a contract of insurance. A material decision includes the making of an application or proposal for a contract of insurance; the issuance, continuance or renewal of a contract of insurance; the exercise of a right under a contract of insurance; the change in any term or condition of a contract of insurance; and the making or settlement of an insurance claim. A "regulated activity" will also include "the act of giving regulated advice", which is advice in connection with the aforementioned activities.

Although the amendments relating to the regulation of insurance intermediaries and conduct requirements have yet to come into operation, insurance industry stakeholders should carefully consider their implications and make preparations. In particular, insurance industry stakeholders should be aware of any future guidelines issued by the IIA, especially in relation to the definition of "regulated activities" as well as the relevant code(s) of conduct, in order to avoid contravening the provisions of the IO.


Currently, insurers have to pay an annual authorisation fee to the OCI at a fixed rate. This is HKD227,300 for non-captive, general insurers and long term insurers. The fee for captive insurers is HKD22,600 and the fee for existing composite insurers is HKD454,600.

Pursuant to the new regime, as of 26 June, the annual authorisation fees will comprise two parts: a fixed fee of HKD300,000 (for a captive insurer, HKD30,000; and for a composite insurer, HKD600,000) and a variable fee calculated on the insurer's insurance liabilities. Initially this will be a variable amount of 0.0001% and will be increased incrementally up to 0.0039% from 26 June 2022 onwards. The variable fee will be capped at HKD7 million annually, so the maximum annual authorisation fee (i.e. the aggregate of the fixed and variable fees) payable by a non-captive insurer will be HKD7.3 million. The cap will be reviewed from time to time having regard to factors including overall market situation, the IIA's financial position and the impact on industry.

User fees will also be introduced for 11 frequently used services including: applications for the approval of controllers, directors, key persons in control functions or appointed actuaries; notifications for the appointment of certain controllers, directors, key persons in control functions, auditors or actuaries; updates to the insurer's information on the register of authorised insurers or obtaining a duplicate certificate of authorisation.

Separately, it is proposed to introduce a levy on insurance premiums by way of further subsidiary legislation, which has been indicated will likely commence on 1 January 2018. It is anticipated that the IIA's target levy will be 0.04% in the first year, increasing incrementally to 0.1% in the sixth year, subject to a cap of HKD100 for life policies and HKD5,000 for general insurance policies. It is also proposed that reinsurance contracts will be exempt while certain group life policies with medical protection will be subject to the same cap as applicable to general insurance policies. The levy will be imposed on policyholders and collected by insurers to remit to the IIA.

Concluding comments

Given the uncertain nature of how some of these amendments will be implemented in practice, all insurance industry stakeholders should carefully consider the changes coming into effect in June, pay heed to future guidelines to be issued by the IIA (including supplements and revisions to existing guidance notes), and take steps to comply with the requirements of the new regulatory regime.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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