Hong Kong’s regulations on the insurance industry have undergone considerable change in recent months. The new Independent Insurance Authority (IIA), which started work on January 1 2017 will take over the functions of the Office of the Commissioner of Insurance (OCI) and will implement a statutory licensing regime to improve corporate governance and consumer confidence in the industry. With the IIA’s investigative and disciplinary powers under the Insurance Companies (Amendment) Ordinance, insurers may be fined and even face a suspension from operating if they breach governance measures. The strongest companies in the sector should have nothing to fear, but the weakest players may suffer under the new, tougher regulatory regime.

The latest guidance notes from the OCI impose stricter governance measures for insurance company boards and prohibit advance commission payments. Hong Kong’s 161 authorised insurers and overseas authorised insurers with over 50% of their gross premium income from Hong Kong insurance business will need to meet these standards.

Guidance notes

Guidance note 10 requires that:

  • At least one-third of the board to be independent non-executive directors
  • The role of the chairman and chief executive be separated
  • Key people to be appointed for control functions, including actuarial, financial control, internal audit, compliance, risk management and intermediary management
  • The board establishes an audit committee and risk committee
  • New requirements on remuneration policies covering all directors, senior management and key persons in control functions

One of the most controversial effects of the guidance note on those working in the insurance industry will be on remuneration. “The written remuneration policy must cover directors, controllers, senior management and material risk takers,” says Adelina Wong, consultant at Oldham, Li & Nie. “Guidance note 10 sets limits on variable pay and option schemes and there will be no guaranteed bonuses.”

Adelina Wong

Having a sufficient number of independent non-executive directors (INEDs) is aimed at keeping the influence of management in check. “It will add to the burden of any director and INEDs, who will need to understand and fulfill a new range of responsibilities,” says Wong.

As part of the independent criteria of INEDs, former employees of the insurer must wait three years before being permitted to be on the board. “It will be difficult for local insurers to find qualified INEDs with industry experience, particularly in the actuarial and underwriting areas, who aren’t already conflicted because they are on the board of a competitor,” says Greg Crichton, consultant at Oldham, Li & Nie.

Guidance note 16 imposes new requirements for the fair treatment of customers and will be effective for new and existing policies for existing long term products. It has been effective as of April 1 2016 for new long-term products. In addition to stricter requirements on sales and post-sale arrangements, it also affects the pay of insurance intermediaries in that any advance commission payments are prohibited.

“Any attempt to circumvent the requirements of guidance note 16 will be regarded as acting in bad faith which could affect the fit and proper test for controllers under the Insurance Companies Ordinance,” says Wong. “In the worst case scenario, an insurer will have its authorisation to do business revoked if controllers have their appointments revoked as being not fit and proper persons.”

“The goal is to meet policy holders’ reasonable expectations and provide a governance framework that adequately protects their interests,” says Crichton.

“There are remuneration requirements under guidance notes 10 and 16, including a prohibition on insurers offering advance commissions. Sales staff employed by insurance companies may see a major impact since they may be on upfront payments and immediate bonuses,” says Wong.

Hong Kong’s reforms in context

The International Association of Insurance Supervisors (IAIS) covers 200 jurisdictions in 140 countries and offers a global standard for the insurance industry.

Greg Crichton

“Hong Kong is behind jurisdictions such as the UK and Singapore in many respects and we are playing catch up, for example, in terms of compliance with IAIS standards” says Crichton.

But observers expect further reforms through the policyholders’ protection fund (PPF) and the implementation of a risk based framework for the insurance industry in Hong Kong.

“Some foreign insurance companies coming into Hong Kong will be caught by the new corporate governance requirements, as their subsidiaries now have to comply with guidance note 10 as long as 50% or more of their annual grow premium income comes from Hong Kong business,” says Crichton.

“For the fit and proper requirement, some places such as Indonesia require the fit and proper test prior to being a board member,” says Crichton. “The IIA will be staffed by about twice the number of people in the current OCI hence it is likely that they will be more interventionist, and with external audits of insurers as well as brokers.”

The provisions in the guidance notes will allow Hong Kong’s insurance authority to have more scrutiny over the industry. More auditing and stringent enforcement of the sector are on the way. The power to revoke an insurance company’s licence to operate is a lethal one that may kick the weakest players out of the game.