A Q&A GUIDE TO INSURANCE AND REINSURANCE LAW IN HONG KONG
MARKET TRENDS AND REGULATORY FRAMEWORK
1
Please give a brief overview of the insurance and reinsurance markets
in your jurisdiction, identifying market trends
The information below is taken from the 2008 Annual Report of the Office of the
Commissioner of Insurance (OCI) of the Hong Kong Government. Unless otherwise
stated, statistics are as at 31 December 2007.
Market data
Low entry barriers mean the insurance market is crowded and competitive. There
are 178 authorised insurers comprising:

112 general business insurers.

47 long-term business (life) insurers.

19 composite insurers (both general and long term).
Pure reinsurers (insurers authorised to carry on only reinsurance business) form 14
of the general business insurers and five of the composite insurers.
Most international insurers have operations in Hong Kong. Over 50% of insurers are
incorporated locally, often as a local subsidiary of a large international insurer,
with the rest coming from 23 different countries, but predominantly from the US
(14), Bermuda (14) and the UK (13).
Hong Kong has:

508 registered insurance brokers.

31,042 registered insurance agents.
The major lines of business, using total premiums as the benchmark, are:

General business:
o
Accident and health (26%)
o
General liability (24%)
o
Property damage (22%)
o
Motor vehicle (11%)

Long-term business:
o
Individual life business (88%)
o
Retirement scheme management (9%)
Premium income
The insurance industry makes a major contribution to the economy. Gross annual
premium income increased significantly during the 1990s and continued to do so
until 2008 (before the economic crisis). Gross premium income for 2007 totalled
HK$195 billion (about US$25.2 billion) (over 12% of GDP).
Long-term business forms the largest sector of the insurance market. Gross
premiums for long-term business in 2007 totalled HK$173 billion (just over 87% of
2007’s total premium income). Individual life insurance is the largest part of this
business (88%). At the end of 2007, about 7.1 million individual life policies were in
force, equivalent to more than one life policy per resident.
General business only grew by 5.7% during 2007 (gross premiums totalling HK$24
billion (about US$3.1 billion)). Local assets maintained for general business for
2007 totalled over HK$79 billion (about US$10.2 billion). However, underwriting
profit for general business was significantly down in 2008.
Insurance penetration (measured as premiums as a percentage of GDP) stood at
10.7% for long-term business, but only 1.5% for general business.
Market concentration
The general business market remains fragmented. The top ten insurers have
historically been responsible for only about 40% of market share by gross premium.
The life insurance market has traditionally been far more concentrated. The top
ten life insurance companies enjoy a market share by office premium of just over
74%, half of which is concentrated within the top four companies.
The pure onshore reinsurance market is also very concentrated. In 2007, the top
five reinsurers had an aggregate market share of over 82% in gross premiums for
direct insurers.
Major trends
The major insurance market trends over the past few years include:

The growth of wealth management and investment linked products. From
1990 onwards, an ageing population and increased prosperity led to a large
increase in the sale of wealth management and retirement planning
products, predominantly investment-linked insurance policies. By the end of
2007 investment-linked products accounted for more than half of life
business by gross premium. Investment-linked business declined during 2008
with premiums falling by just under 40%, and figures for the first quarter of
2009 showed a fall of a further 51% (compared with the same period in
2008). This trend will probably continue as consumers switch from
maximising returns to capital preservation.

Creation of the Mandatory Provident Fund scheme (MPF). This compulsory
retirement savings scheme was introduced at the end of 2000. Under the
MPF, employers and employees must contribute a monthly minimum amount
of salary (currently HK$1,000 each (about US$130)) to a privately operated
retirement scheme established and administered under the MFP Scheme
Ordinance. By the end of 2007 there were 70,295 existing retirement
scheme contracts carrying net liabilities of HK$145.7 billion (about US$18.8
billion).

Closer Economic Partnership Arrangement (CEPA). CEPA is the first free
trade agreement between Hong Kong and Mainland China. Since it came
into effect in 2004, locally incorporated insurers in Hong Kong who meet the
access conditions can conduct insurance business in Mainland China. CEPA
also allows Hong Kong residents with the necessary qualifications and who
are appointed by mainland insurance institutions to carry on insurancerelated business in Mainland China. Since 2008, under CEPA Hong Kong
insurance agencies can set up wholly owned enterprises in the mainland to
provide insurance agency services to mainland insurance companies.
2
What is the regulatory framework for insurance/reinsurance activities?
Hong Kong is a Special Administrative Region (SAR) of the People’s Republic of
China. Hong Kong has an entirely separate legal system from Mainland China. Its
constitutional framework is derived from the Basic Law under which Hong Kong
exercises executive, legislative and independent judicial power. Under the “one
country, two systems” principle, Hong Kong law has, since 1997, remained based
on English common law supplemented by local legislation (largely based on English
legislation) and will do so until at least 2047.
Insurers and insurance intermediaries are regulated by various bodies and a
mixture of statues, government regulation and self regulation.
Insurance Companies Ordinance (ICO)
The legal framework for the insurance industry is provided by the ICO and its
subsidiary legislation including the:

Insurance Companies (Determination of Long Term Liabilities) Regulation.

Insurance Companies (Margin of Solvency) Regulation.

Insurance Companies (General Business) (Valuation) Regulation.
The ICO is derived from the English Insurance Companies Act 1974 (as amended in
1981 and then consolidated in the Insurance Companies Act 1982). The ICO
recognises and regulates:

Insurers. An insurer carries on insurance business in or from Hong Kong
(other than Lloyd’s) (ICO). Insurance business is carried on if it either
(section 2(3), ICO):
o
Maintains an office or agency in Hong Kong for that purpose
o
Holds itself out as carrying on insurance business in or from Hong
Kong.

Insurance agents. An insurance agent holds himself out to advise on or
arrange insurance contracts in or from Hong Kong as an agent or sub-agent
of one or more insurers. An appointed insurance agent is an insurance agent
appointed by and registered with an insurer as an agent. Only an appointed
insurance agent can hold himself out as an insurance agent.

Insurance brokers. An insurance broker carries on the business of
negotiating or arranging contracts of insurance in or from Hong Kong as the
policyholder’s or potential policyholder’s agent, or advising on insurancerelated matters. An authorised insurance broker is an insurance broker who
is either:

Authorised by the Insurance Authority under section 69

A member of a body of insurance brokers approved by the Insurance
Authority (see below) under section 70.
The contract only requires some element of insurance for the person arranging
it to require authorisation as a broker, and only an authorised insurance broker
is permitted to hold itself out as an insurance broker.
The ICO uses the collective term “insurance intermediaries” for insurance agents
and insurance brokers. A person cannot act as both an appointed insurance agent
and an authorised insurance broker (section 65(3), ICO).
Insurance Authority (IA)
The main regulatory body is the IA, established under the ICO. The Commissioner
of Insurance is responsible for supervising and regulating the insurance industry.
The IA authorises insurers, and monitors and scrutinises their financial strength and
sustainability by reviewing their financial statements and business returns, ensuring
compliance with the solvency standards and other ICO requirements, including
requirements for:

General insurers to maintain assets in Hong Kong.

Long-term insurers to maintain the statutory solvency margin.

Insurers to submit annual audited financial statements and business returns,
and for long-term insurers to submit actuarial reports.

Supervising insurance intermediaries.
The IA can issue guidelines on the exercise of its functions (ICO). These are for the
guidance of authorised insurers, insurance intermediaries and their auditors and
actuaries. To date, the IA has issued 13 guidance notes (referred to with the prefix
GN) (www.oci.gov.hk/press/index_03_01.html). The guidance notes are not legally
binding, but importantly they indicate how the IA interprets and enforces ICO
requirements. Breach of the guidelines is likely to lead to increased IA regulatory
scrutiny.
Hong Kong Federation of Insurers (HKFI)
The HKFI (see box, Main insurance/reinsurance trade organisations) represents the
insurance industry. Most authorised insurers are members (at the end of September
2009, it had 90 general business members and 44 life insurance members). It plays
an important role in the self-regulation of the industry though various codes of
practice, guidance notes and other self-regulatory measures including the:

Code of Conduct for Insurers (Insurers’ Code).

Code of Practice for the Administration of Insurance Agents (Agency Code).
The Insurers Code sets out the standards with which HKFI members must comply
when issuing consumer insurance contracts (private insurance contracts with Hong
Kong resident individuals). The Agency Code (the HKFI will soon release the revised
seventh edition) sets out the requirements for appointing, supervising and
monitoring of insurance agents by their appointing insurer.
CONTRACTS OF INSURANCE
3
What is a contract of insurance for the purposes of the law and
regulation in your jurisdiction?
There is no statutory definition of an insurance contract for the purposes of law or
regulation in Hong Kong.
As Hong Kong law is based on English common law, the defining principles of an
insurance contract can be derived from the English Prudential Insurance Company v
Commissioners of Inland Revenue [1904] 2KB 658. An insurance contract under
Hong Kong law is therefore a contract where one party (the insurer) agrees, in
return for consideration (the premium), to indemnify or provide a benefit to the
other party (the insured) if an uncertain and adverse event occurs.
As under English law:

The usual contract law principles such as offer and acceptance,
consideration and intention to create legal relations apply.

The insured must have an insurable interest in the subject matter of the
insurance policy at the time a claim is made.

The insurance contract does not have to be in writing (except for marine
insurance), although almost every insurance contract is in writing.
4
Are all contracts of insurance regulated in your jurisdiction?
All insurance contracts are regulated. The insurance business classes relevant for
ICO purposes are set out in the Ordinance, including a narrative for each class
describing the features of a contract falling within that class.
A contract within these classes and which is not otherwise an insurance contract
(for example, because it is not an indemnity contract such as a life insurance
policy) is deemed an insurance contract for ICO purposes (section 3(2), ICO). It is
unlikely that any insurance contract would fall outside this comprehensive list.
INSURERS AND REINSURERS
5
Are insurers and reinsurers regulated in the same way in your
jurisdiction?
The ICO does not distinguish between an insurer and a reinsurer (they both fall
within the ICO definition of insurer) and are therefore regulated almost identically,
except that:

There is no requirement for a pure reinsurer to maintain assets in Hong
Kong in compliance with section 25A of the ICO.

An insurer is authorised to carry on either general business or long-term
business, but not both (it is no longer possible for an insurer to obtain a
composite licence, that is one licence permitting it to carry on both general
business and long-term business), but a professional reinsurer can obtain a
composite licence.

Professional reinsurance companies enjoy a preferential tax treatment (see
Question 27).
Therefore, in this chapter “insurer” includes a reinsurer, and references to
insurance include reinsurance unless otherwise stated.
6
Can insurers or reinsurers carry on non-insurance business? Please
summarise any restrictions on their business activities.
Insurers can carry on non-insurance business. However, the IA does not authorise
applicants to carry on insurance business in or from Hong Kong unless it is satisfied
that the carrying on of some other form of business is not contrary to existing or
potential policyholders’ interests (section 8(3)(g), ICO). The authorisation
conditions continue to apply to insurers after authorisation.
7
Are there any statutory limits or other restrictions on, or requirements
relating to the transfer of risk by, insurance or reinsurance companies?
There is no statutory limit or restriction on the transfer of risk but the following
matters are relevant.
To be authorised as an insurer, applicants (except captive insurers) must satisfy
the IA that they would not engage in a fronting operation (under which the ceding
company (the primary or fronting company) cedes the risk it has underwritten to
its reinsurer with the ceding company retaining none or a small part of that risk for
its own account) (Authorisation Guidelines). These conditions continue to apply to
an insurer after authorisation. What constitutes a small part of that risk is not
specified, but it would generally be difficult to persuade the IA to accept risk
retention of less than 10% of a particular class of business.
An insurer must either have adequate reinsurance arrangements for the risks of
each class of business it insures, or justify to the IA why there are no arrangements
for this purpose (section 8(3)(c), ICO). Further guidance on reinsurance
arrangements with related companies is set out in GN12, but the IA only accepts
this kind of reinsurance if those related companies have a sufficiently high credit
rating.
OPERATING RESTRICTIONS
8
Does the entity or person have to be authorised or licensed in your
jurisdiction? If so, please outline the key steps involved in this process
and the requirements that must be satisfied.
Insurers
A company wishing to carry on insurance business in or from Hong Kong must apply
to the IA under section 7(1) of the ICO for authorisation to carry on the relevant
classes of insurance business.
The main requirements for authorisation are set out in the ICO (principally section
8(3)), including requirements covering:


The applicant’s:
o
Place of incorporation (it must be a company)
o
Financial status
o
Reinsurance arrangements
o
Ability to comply with the ICO and the fitness of its directors and
controllers.
Finance, including that the applicant must both:
o
Have the minimum amount of paid up share capital
o
Maintain an excess of its assets over its liabilities of not less than the
required solvency margin (to safeguard the risk its assets are
insufficient to meet its liabilities in unpredictable events).

Paid-up share capital. An insurer must generally have a minimum share
capital of HK$10 million (about US$1.29 million). This is increased to HK$20
million (about US$2.58 million) for a composite insurer (both general and
long-term business) and for an insurer carrying out statutory insurance
business (mainly motor vehicle or employees’ compensation). The minimum
capital requirement is, however, reduced to HK$2 million (about
US$260,000) for a captive.

The insurer maintaining a solvency margin more than the statutory amount
for up to three years from authorisation.
For a general business insurer the solvency margin is the greater of:
o
20% of the relevant premium income up to HK$200 million (about
US$25.8 million), plus 10% of the amount by which the relevant
premium income exceeds HK$200 million
o
20% of the relevant claims outstanding up to HK$200 million, plus
10% of the amount by which the relevant claims exceed HK$200
million.
This is subject to a minimum of HK$10 million and increased to HK$20
million for insurers carrying on statutory business.
For a long-term business insurer, the solvency margin is the greater of:
o
HK$2 million
o
The amount specified under the Insurance Companies (Margin of
Solvency) Regulation 1995 (generally 4% of the mathematical
reserves and 0.3% of the capital at risk).
For a captive the solvency margin is the greater of:
o
HK$2 million
o
5% of net premium income
o
5% of net claims outstanding
The applicant must also satisfy the IA that it will comply with the additional
Authorisation Guidelines requirements, including:

Maintaining an office as its place of business in Hong Kong with a
professional management and staff establishment appropriate to the nature
and scale of its operations based in that office.

A locally based chief executive as its controller.

Keeping and maintaining proper account books to enable audit and actuarial
valuations.

Sufficient financial resources to finance its operations set out in its threeyear business plan.

Financial backing of its parent or controller, who must be reputable persons
of good financial standing.

A board of directors with sufficient knowledge and experience of the
insurance business.
In addition, a long-term business applicant must satisfy the IA:

That it has sufficient actuarial expertise, including a qualified staff actuary
to advise on relevant matters (and must submit a report and certificate
from the qualified actuary on the applicant’s business plan confirming
prudent and satisfactory arrangements regulating actuarial matters have
been made).

Where the applicant intends to carry on investment-linked business, that it
has adequate accounting procedures to properly identify and value assets
and liabilities, and provide timely reports to policyholders, and that it has
sufficient investment management expertise to manage the invested funds.
An overseas applicant must also satisfy the IA that it:

Is incorporated in a country where there is a comprehensive company law
and insurance law.

Is an insurer under the effective supervision of an insurance authority in its
home jurisdiction.

Is a well-established insurer with international experience and of undoubted
financial standing.
Alternatively, it may establish a local subsidiary to carry on its business,
thereby avoiding these additional requirements.
Various documents must be filed with the application including:

A business plan.

A market feasibility report demonstrating the viability of that business plan.

Particulars of all directors and controllers.
Insurance agents
An insurance agent must be appointed by and registered with an authorised
insurer. The agent must also be registered with the IARB (Agency Code). An
insurance agent may also appoint:

Responsible officers (responsible for the conduct of their insurance agency
business).

Technical representatives (who undertake the agent’s day-today insurance
agency business).
Responsible officers and technical representatives must also be registered with the
IARB.
The registration requirements for insurance agents, responsible officers and
technical representatives are set out in the Agency Code. These persons must be fit
and proper and the Agency Code sets out the IARB’s grounds in deciding this.
Agents must also comply with the other Agency Code requirements (Minimum
Requirements for Agents) concerning age, residency or work visa and educational
level, and have the minimum qualifications (clauses 52 to 65, Agency Code),
including having passed all relevant papers of the Insurance Intermediaries
Qualifying Examination (IIQE) unless exempt). In addition:

The insurer must appoint its insurance agents under a written agency
agreement meeting the minimum requirements of a model agency
agreement adopted by the HKFI from time to time.

The insurer must keep and maintain, and allow public inspection of, a
register of appointed insurance agents, and a sub-register of their
responsible officers and technical representatives.

An insurance agent cannot act for more than four insurers, of which no
more than two can be long-term insurers.

A responsible officer or technical representative of an insurance agent
cannot be a responsible officer or technical representative of another
agent.
Insurance brokers
Most insurance brokers become authorised by joining one of the two authorised
self-regulatory bodies (the CIB or PIBA). Therefore, the authorisation requirements
and procedure depend on that body’s rules. However, using the CIB and its
membership regulations as an example, the applicant must comply with the
minimum requirements for the authorisation of an insurance broker specified by
the IA (sections 69(2) and 70(2), ICO (Minimum Requirements for Brokers))
including the requirements on:

Age. The broker or its chief executive must be over 21.

Residency or work visa. The broker or its chief executive must be a Hong
Kong permanent resident or a Hong Kong resident whose employment visa
conditions do not restrict him from being engaged in insurance broking
business.

Qualifications and experience. The broker or its chief executive must have
an acceptable insurance qualification and a minimum of two years’
experience in insurance in a management position and have passed the IIQE
(unless exempted).

Capital and net assets. The applicant must have a minimum net asset value
and a minimum paid up share capital of HK$100,000 (about US$12,900).

Professional indemnity insurance. A minimum limit of indemnity for any
one claim and in any one insurance period of 12 months of not less than the
greater of HK$3 million (about US$387,000) or an amount depending on its
aggregate insurance brokerage income.

Client accounts. Separate client accounts must be kept.

Books and accounts. Proper books and accounts must be kept.
The applicant must also satisfy the CIB it is fit and proper to be an insurance
broker and that its chief executive and technical representatives are also fit and
proper to hold those positions.
9
Please summarise the main exemptions or exclusions from
authorisation or licensing that are available in your jurisdiction, if any.
Insurers
The restriction on carrying on an insurance business in or from Hong Kong without
otherwise being authorised by the IA does not apply to:

Lloyd’s names.

An underwriters’ association with IA approval (although to date only one has
been approved).
The following are exempt from IA authorisation (section 51, ICO):

Any body of persons, corporate or incorporate bound together by custom,
religion, kinship, nationality or regional or local interest, not for the
purpose of gain and whose gross premium income does not exceed
HK$500,000 (about US$64,500).

A person carrying on Hong Kong reinsurance business only, although this
exemption does not apply to:
o
A body corporate incorporated in Hong Kong
o
A body corporate incorporated elsewhere which has a place of
business in Hong Kong
o
Any other person or any partnership having a place of business in
Hong Kong.

A registered trade union carrying on insurance business for members’
provident fund or strike benefits.

A registered co-operative society.

The Hong Kong Export Credit Insurance Corporation.

An authorised institution under the Banking Ordinance (limited to certain
classes of business).

The Credit Union League of Hong Kong.

A recognised clearing house under the Securities and Futures (Clearing
Houses) Ordinance to the extent it guarantees the settlement of securities
transactions.
The Chief Executive in Council can exempt an insurer from IA authorisation (section
53, ICO).
Insurance agents
Authorised insurers and Lloyd’s names are not required to be appointed as
insurance agents, but this does not extend to any of their agents.
Insurance brokers
Authorised insurers and Lloyd’s names are not required to be authorised as
insurance brokers.
A person who holds himself out in Hong Kong as an insurance broker for reinsurance
contracts only is not required to be authorised as an insurance broker. However,
this exemption does not apply to:

A body corporate incorporated in Hong Kong.

A body corporate incorporated elsewhere which has a place of business in
Hong Kong.

A person represented here by an agent or any person or partnership having
a place of business in Hong Kong.
10
Are there any restrictions on the ownership or control of insurancerelated entities in your jurisdiction (for example, age, nationality,
qualification or other restrictions)?
Insurers
Hong Kong does not discriminate against foreign companies. There are no
restrictions on or qualifications concerning ownership or control of an authorised
insurer, except that the IA must be satisfied that all its directors and controllers
are fit and proper to hold those positions (see GN4). There is no nationality
requirement, but in determining if the applicant’s directors and controllers are fit
and proper there are requirements concerning their qualifications and experience.
For example, an insurer’s chief executive generally must hold recognised
professional qualifications. An insurer must also appoint a locally based chief
executive as controller.
Insurance agents
Restrictions include age, residency or unconditional employment visa and
qualifications requirements for insurance agents who are individuals, and its
responsible officers and technical representatives for corporate agents, but no
requirements for an insurance agent’s owners or controllers (Minimum
Requirements for Agents).
Insurance brokers
The position is similar to that for insurance agents. A broker and its chief executive
and technical representatives must be fit and proper, and satisfy the Minimum
Requirements for Brokers (see Question 8) including those for age, residency or
unconditional employment visa and qualifications.
11
Do owners or controllers have to be pre-approved by or notified to the
relevant authorities before taking, increasing or reducing their control
or ownership of the entity?
Insurers
Before authorising the applicant as an insurer, the IA must be satisfied the
applicant’s directors and the controllers are fit and proper to hold these positions
(see GN4 for guidance and IA interpretation).
A controller of an authorisation applicant includes not only its directors and chief
executive but also any person that either (section 9, ICO):

In accordance with whose directions or instructions the directors of the
applicant or of a body corporate of which it is a subsidiary (or any of them)
are accustomed to act.

Who, alone or with any associate or through a nominee, is entitled to
exercise or control the exercise of, 15% or more of the voting power at any
general meeting of the applicant or a body corporate of which it is a
subsidiary.
Where there is a change in this type of owner controller for an insurer incorporated
in Hong Kong, IA consent is required if the new owner controller (either alone, or
with any associate, or through its nominee) is entitled to exercise, or control the
exercise of, 15% or more of the voting power of that insurer at any general meeting
of the insurer.
Appointing a managing director or chief executive of an authorised insurer must
involve prior notice to the IA. The IA may, within three months of notice, object to
the proposed appointment because that person is not fit and proper to hold that
position. Unless three months has expired without a notice of objection (or
confirmation the IA has no objection) no such person may be appointed,
appointment otherwise being an offence.
Insurance intermediaries
There are various restrictions set out in section 65 of the ICO on a person who is a
proprietor or employee of, or partner in, an insurance agent or insurance broker
being a proprietor, director or employee of, or partner in, another insurance agent
or insurance broker.
Insurance agents
The IA may not consider a corporate insurance agent fit or proper to act, or to
continue to act, as an insurance agent if any of its directors or controllers are not
considered fit and proper to act as an insurance agent if they applied as an
individual (except for requirements they are a Hong Kong permanent resident with
the necessary qualifications or experience industry experience and have passed the
IIQE). A controller under the Agency Code has the meaning defined in the ICO
(section 9, ICO).
Insurance brokers
An insurance broker that is a limited company must satisfy the IA that
executive, directors and controllers are fit and proper to hold that
(section 9, ICO). The Minimum Requirements set out further guidance on
IA applies this test. 12. Please summarise the key ongoing requirements
authorised or licensed entity must comply with.
12
its chief
position
how the
that the
Please summarise the key ongoing requirements that the authorised or
licensed entity must comply with
Insurers
The main ongoing regulatory requirements for authorised insurers are set out in
Part III of the ICO and are summarised below.

Auditor. An insurer must appoint a qualified auditor in the place where the
insurer is incorporated and notify the IA of the identity of, and any change
in, that auditor.

Books of account and returns. The insurer must maintain proper and
legible account books recording and explaining all the insurer’s
transactions. The insurer must make all required returns to the IA of
accounts, reports, statements and other information required under the
ICO.

Annual fee. An annual fee is payable to the IA, the amount depending on
the class of business carried out by the insurer.

Maintenance of assets in Hong Kong. General insurers (but not reinsurers
or captives) are, unless exempted by the IA, required to maintain assets in
Hong Kong of an amount and type determined under section 25A of the ICO.

Further requirements for insurers carrying on long-term business. The
insurer must:
o
Appoint a duly qualified actuary, who must comply with the
standards specified in the Insurance Companies (Actuaries’
Standards) Regulation (or other standards accepted as comparable
by the IA), and notify the IA of any change in that actuary
o
Notify the IA of the arrangements for the actuary to have direct
access to the board of directors of the insurer to enable them to
carry out their duties
o
Comply with both:

Section 22 of the ICO for the continued separation of assets
and liabilities attributable to that long-term business (or, if
the long-term insurer is incorporated outside Hong Kong, and
with prior IA authorisation, attributable only to that part of
its long-term business carried out in Hong Kong

Section 11 of the Solvency Regulations that not less than onesixth of the solvency margin is held in its long term business
funds.
The Insurers Code applies to all HKFI members when effecting insurance in Hong
Kong for individual policyholders resident in Hong Kong and insured in their private
capacity. The main ongoing requirements relate to:

Using plain language in their documentation and ensuring sales materials
and illustrations contain information which is accurate and easy to
understand.

Efficient and fair handling of claims.

Managing, and handling complaints against, their agents.

Managing employees.

Avoiding misconduct.

Efficient and fair handling of enquiries, complaints and disputes.
The principal guidance notes containing ongoing obligations are:

GN3: prevention of money laundering.

GN8: use of the internet.

GN10: corporate governance.
Insurance agents
There are various ongoing obligations for agents (sections 71 to 74 (for general
agents) and sections 75 to 79 (for life agents), Agency Code). Agents must always
conduct business in good faith and with integrity, and comply with the other
Agency Code requirements relating to their dealings with, and information they
must provide to existing and prospective policyholders.
Insurance brokers
Authorised insurance brokers must submit to the IA:

Annual audited financial statements.

An auditor’s report on those financial statements confirming the broker
continues to satisfy the minimum requirements for capital and net
assets, professional indemnity insurance, keeping of separate client
accounts and the keeping of proper books and accounts.

Such further evidence the IA may require to demonstrate the broker has
continued to comply with the requirements in Question 8.
Continuing professional development (CPD) requirements
Insurance intermediaries and their chief executives, responsible officers and
technical representatives must comply with the CPD programme requirements
under the Insurance Intermediaries Quality Assurance Scheme (IIQAS). The current
requirement is to complete at least ten CPD hours annually, generally obtained by
attending accredited training courses. Failure to comply is likely to lead to
disciplinary action including de-registration or de-authorisation.
13
Please outline the possible consequences of an entity failing to comply
with applicable legal and regulatory requirements (including the
disciplinary powers any relevant regulators have, as well possible
customer remedies)
Insurers
It is an offence for an unauthorised person to carry on any class of insurance
business in or from Hong Kong (section 6(3), ICO). The maximum penalty for this
offence is a fine of HK$2 million (about US$258,000) and an additional daily fine of
HK$2,000 (about US$258) for each day during which the offence continues and up
to two years’ imprisonment.
Where an insurance contract in relation to any class of insurance business (not
being a reinsurance business) is entered into by an insurer who is not authorised to
carry on that class of business, that contract is, at the option of the policyholder,
either:

Enforceable against the insurer by the policyholder.

Void by reason of that contravention (in which case the policyholder may,
before the expiration of that contract, recover from the insurer any
consideration paid by it under the contract).
A large number of ICO requirements include a provision that any insurer who fails
to comply commits an offence and is liable to a fine (and sometimes a daily fine for
each day the offence continues).
The IA can intervene in an authorised insurer’s business in certain circumstances
including if it considers it desirable for existing or potential policyholders’
protection against the risk the insurer will be unable to meet its liabilities to them,
if (Part V, ICO):


The insurer has either:
o
Failed to satisfy an ICO obligation
o
Provided misleading or inaccurate information to the IA
The IA considers the insurer may be insolvent. This power includes the very
wide right under section 35 of the ICO to require an insurer to take such
action in relation to its affairs, business or property as the IA considers
appropriate, to safeguard existing or potential policyholders’ interests.
Insurance agents
It is an offence for a person to hold themselves out as an insurance agent if they
are not an appointed insurance agent. Penalties range from a fine of up to HK$1
million (about US$129,000) and up to two years’ imprisonment on indictment, and
up to HK$100,000 (about US$12,900) and up to six months’ imprisonment on
summary conviction (section 77(1), ICO).
The Agency Code sets out the power of the IARB to:

Handle complaints.

Take disciplinary action against agents and their responsible officers and
technical representatives.

Require an insurer to take disciplinary action against its agents.
Disciplinary action may include:

Issuing a reprimand.

Suspending or terminating the agent’s contract.

Requiring the agent to take or refrain from taking such action as the IARB
thinks fit.
The IARB has also issued guidelines on how it will exercise its powers under the
Agency Code including Guidelines on Misconduct and Guidelines on Handling of
Premiums.
The IA can require an insurer to de-register any of its insurance agents that fail to
comply with the Agency Code.
Insurance brokers
It is an offence for a person to hold themselves out as an insurance broker if they
are not an authorised insurance broker (section 77, ICO), carrying the same
penalties as the comparable offence for an insurance agent (see above, Insurance
agents).
Each approved body of insurance brokers must have procedures to deal with
breaches of proper conduct by its members. The IA can withdraw a broker’s
authorisation if it fails to comply with the minimum authorisation requirements
(see Question 8) or this withdrawal is justified in existing or potential
policyholders’ or the public’s interests (section 75, ICO). The IA can petition to
wind up a corporate broker or bankrupt an individual broker if it considers it in the
public interest (section 76, ICO).
Unauthorised brokers and non-appointed agents
An insurer cannot enter an insurance contract through an insurance intermediary in
Hong Kong or accept insurance business referred to it by an insurance intermediary
in Hong Kong if that intermediary is not an appointed insurance agent or an
authorised insurance broker. If an insurer does so, the contract is void at the
option of the policyholder, and if the policyholder chooses to treat the contract as
void, it is entitled to the return of its premium.
ICO breaches
There are various offences for insurers or insurance intermediaries who breach the
provisions of Part X of the ICO (section 77, ICO) including:

An insurer who effects an insurance contract through an insurance
intermediary who is not an authorised insurance broker or appointed
insurance agent commits an offence and is liable to a maximum fine of
HK$1 million and up to two years’ imprisonment.

An agent (or principal) who fails to comply with the Agency Code may be
subject to criminal prosecution and a fine of up to HK$100,000.

An authorised insurance broker who fails to keep client monies in separate
accounts is liable on conviction on indictment to a maximum fine of up to
HK$1 million and up to five years’ imprisonment.
Personal liability
A controller, director, manager or other officer of an insurer or insurance
intermediary committing an offence under the ICO commits the same offence if it
is committed with the consent or connivance of, or because of neglect by, that
person (section 57, ICO).
14
Are
there
any
restrictions
on
the
persons
to
whom
insurance/reinsurance services and contracts can be marketed or sold?
Broadly speaking, there are no restrictions on the persons in Hong Kong to whom
insurance/reinsurance services and contracts can be marketed or sold. However,
the English law limitations on the contractual capacity of certain persons, such as
minors and persons suffering from drunkenness or mental incapacity, apply.
Section 64B of the ICO requires persons for whose use or benefit or on whose
account a life insurance contract is entered into to have an insurable interest in
the life assured at inception failing which the policy will void. To avoid problems
with unscrupulous agents marketing to potential policyholders in Mainland China
most life insurers require proof that the applicant was physically present in Hong
Kong when a life policy was sold to them. Under the MIO, the assured under a
marine insurance policy must also possess an insurable interest at inception.
REINSURANCE
15
To what extent can/must a reinsurance company monitor the claims,
settlements and underwriting of the cedant company?
There is no implied duty or right implied into a reinsurance contract for the cedant
to consult with or obtain the consent of the reinsurer before the cedant settles a
claim by the insured. However, the reinsurance contract usually includes express
claims co-operation and claims control clauses.
A claims co-operation clause usually requires the insurer to notify the reinsurer of a
claim under the underlying insurance, and to consult with and co-operate with the
reinsurer in settling that claim. It may also require the insurer to obtain the
reinsurer’s prior consent before settling the claim. A claims control clause goes
further and gives the reinsurer the right to deal with and settle claims directly with
the insured.
The reinsurance contract often includes a “follow the settlements” clause obliging
the reinsurer to follow any settlement reached by the insurer with the insured.
Even if there is no express follow the settlement requirement, the Hong Kong Court
of Appeal case of New Hampshire Insurance Co v Grand Union Insurance Co Ltd &
Anor [1995] 2 HKC 1 held that the reinsurer must follow the settlements of the
insurer.
It is common for the reinsurance contract to give the reinsurer access rights to the
settlement records of the cedant to check the settlement terms. A contractual
term allowing the reinsurer reasonable access to the cedant’s settlement records
and on reasonable notice is also implied. However, the reinsurer has no implied
right of access to the insurer’s underwriting files or information, and it is unusual
for the reinsurer to have this contractual right expressly.
16
What disclosure/notification obligations does the cedant company have
to the reinsurance company?
Since a reinsurance contract is simply an insurance contract between insurers, the
cedant company has the same general disclosure and notification obligations that
an insured has under an insurance contract. These obligations arise out of the duty
of utmost good faith including that the cedant must:

Disclose to the reinsurance company all facts of which it is aware, or
deemed to be aware (and of which the reinsurer is not aware or deemed to
be aware) which may affect the reinsurer’s decision to enter into the
reinsurance contact, or the terms on which it is prepared to do so.

Avoid making misrepresentations before entering into the insurance
contract. The usual misrepresentation principles under English law apply.

Avoid material non-disclosure. The onus is on the reinsurer to prove the
undisclosed information was:

o
Material
o
Within the knowledge of the insurer; and
o
Was not communicated to the reinsurer
Material matters for the cedant in relation to the underlying insurance
contract are likely to be material to the reinsurer, particularly for
facultative reinsurance that is generally considered to involve the insurance
of the same subject matter as the underlying policy.
The reinsurance policy may also impose disclosure and notification obligations on
the cedant, by setting out express terms or by incorporating these terms from the
underlying insurance contract.
INSURANCE POLICIES
17
Please outline the main general form and content requirements for
insurance policies in your jurisdiction, including a description of the
most commonly found clauses.
Generally there are no statutory requirements for the form and content of
insurance policies. The principal exceptions are:

Motor vehicle insurance.

Employees’ compensation insurance.

Marine insurance.

Investment-linked insurance.
Motor vehicle insurance
The Motor Vehicle Insurance (Third Party Risks) Ordinance (MVIO) makes it unlawful
for a person to use, or permit another person to use a motor vehicle on a road
unless an insurance policy is in force insuring these persons for any liability they
may incur in relation to the death of or bodily injury to any person caused by or
arising out of the use of that motor vehicle on a road. Certain provisions of the
MVIO dictate an insurer’s policy terms including that:

Any condition precedent or condition subsequent to liability is of no effect.

The insurer cannot avoid or restrict its liability by reference to various
matters including the age or physical or mental condition of the driver or
the vehicle’s condition (section 12(1), MVIO).
Employees’ compensation insurance
The Employees’ Compensation Ordinance (ECO) requires an employer in Hong Kong
to maintain an insurance policy to cover its liabilities to pay compensation for
injury by accident or for the death of employees arising out of or in the course of
their employment. Sections 40A and 41(1) of the ECO require the insurer to include
certain information in that policy, including the:

Employer’s name.

Insured’s name.

Policy number.

Date of policy’s issue.

Dates of commencement and expiry of the period of insurance.

Number of employees insured under the policy at the time of issue.

Amount of the liability insured under the policy.
Marine insurance
The Marine Insurance Ordinance (MIO) requires that a contract of marine insurance
must:

Specify the assured’s name or of some person who effects the insurance on
his behalf.

Designate, with reasonable certainty, the subject matter insured.
Investment-linked insurance policies
Certain Class C investment-linked life insurance policies fall within the definition of
a collective investment scheme under the Securities and Futures Ordinance (SFO).
GN11 provides guidance on Class C products, and insurers issuing these products
must seek authorisation from the Hong Kong Securities and Futures Commission
(SFC) for the product’s marketing materials (section 105, SFO). The SFC has
produced a checklist of provisions that must be included in these materials for
them to be approved and to allow the product to be sold.
Other relevant ordinances
The following ordinances may also be relevant:

The Misrepresentation Ordinance (a term purporting to exclude liability for
misrepresentation is only valid if reasonable).

The Unconscionable Contracts Ordinance (under which the court has a wide
power to grant relief in relation to an unconscionable term in a consumer
contract including holding this term or the entire contract unenforceable).
An insurer cannot exclude or limit its liability for its appointed insurance agent’s
actions in the dealings for the issue of an insurance contract and insurance business
relating to that contract (section 68(2), ICO).
HKFI Code of Conduct
Under this code, HKFI members must draft policy documentation for consumer
insurance contracts in plain and simple language.
Common clauses
A valid insurance contract must contain agreed terms including the:

Subject matter of the policy.

Obligation to indemnify (other than for life contracts).

Duration of the risk.

Premium amount.

Sum insured.
18
Please identify any terms found in insurance policies in your
jurisdiction that are implied by law or regulation (identifying the
applicable laws or regulations and any mandatory provisions).
The duty of utmost good faith applies to all insurance contracts. This duty is
specifically incorporated into marine insurance contracts (section 17, MIO) and
means the insured must disclose to the insurer all facts of which the insured is
aware (and of which the insurer is not aware or deemed to be aware) which may
affect the insurer’s decision to enter into the insurance contract or the terms on
which it is prepared to do so. It also means the insured must:

Not make misrepresentations before entering into the insurance contract
(English legal misrepresentation principles apply).

Avoid material non-disclosure.
Breach of this duty allows the insurer to avoid the policy (provided it establishes
inducement to enter into that policy by a material false statement).
The insurer owes the same duty to the insured (although under the scope of that
duty, it is harder to define what is material to the insured).
Other terms implied into an insurance contract are:

That the insured must have an insurable interest.

The existence and identification of the subject matter of the insurance.

The insurer’s subrogation rights.
An insurer cannot exclude or limit its liability for the actions of its appointed
insurance agent in the dealings for the issue of a contract of insurance and
insurance business relating to that contract (section 68(2), ICO).
19
What customer protections are generally included in insurance policies
to supplement relief available under general law?
The OCI and the insurance industry have taken a series of measures to enhance
consumer protection for long-term insurance policies. These measures include:

A customer protection declaration form.

A cooling-off period for long-term insurance policies.

Illustration standards for long-term insurance policies.
Customer protection declaration form (CPDF)
The CPDF was introduced under the Code of Practice for Life Insurance
Replacement issued by the insurance industry as a self-regulatory measure. Where
an existing life policy is replaced (or where 50% or more of the guaranteed cash
value of the existing policy is reduced), the CPDF must be completed to confirm
the insurance intermediary has clearly explained to the policyholder the
consequences and potential disadvantages and has been provided with the OCI’s
pamphlet on the subject.
Cooling-off period for long-term insurance policies
Policyholders are given a cooling-off period in which to review, cancel and obtain a
full refund or premium (less a market value adjustment where applicable) on their
long-term insurance policy. The cooling-off period ends 21 days after the earlier of
delivery to the policyholder or their representative of either:

The policy.

A notice informing the policy holder of the availability of the policy for
collection and the expiry date of the cooling off period.
Insurers must keep a copy of the acknowledgement of the receipt of the policy or
the notice to confirm when the cooling off period ends.
The new period is effective 1 February 2010.
Illustration standards for long-term insurance policies
To enhance the transparency of life policies and enable prospective policyholders
to make informed decisions, insurers must provide prospective policyholders with a
summary (in the required form), of:

Insurance benefits.

Investment returns.

Surrender values.
20
Please identify examples of standard policies or terms produced by
trade associations or relevant authorities, if any, and explain how these
can be obtained.
The HKFI has produced the following standard form insurance policies and terms:

Building owners’ corporation third party liability insurance policy.

Commercial vehicle insurance policy.

Compulsory third party liability insurance clauses (local vessels).

Employees’ compensation insurance policy.

Premium adjustment and declaration of earnings form.

Motorcycle insurance policy.

Motor trade insurance policy.

Private motorcar insurance policy.
These can be downloaded from the HKFI website (www.hkfi.org.hk).
21
What must be established to trigger a claim under an insurance policy?
The trigger for a claim depends on the policy’s notification provisions, but typically
the insured must notify the insurer of one or more of the following:

Any occurrence which may give rise to a claim against the insured.

Any loss suffered by the insured.

Any claim made against the insured.

Any circumstances which may give rise to a loss suffered by the insured or
to a claim made against the insured.

For fidelity policies, reasonable suspicion of an employee’s fraud or
dishonesty, irrespective of whether loss has been suffered.
22
Please identify brief circumstances in which third parties can claim
under an insurance policy?
An insured’s rights under an insurance policy can be transferred to and vest in a
third party (section 2(1), Third Parties (Rights Against Insurers) Ordinance) when
the insured satisfies all the following:

It is insured against liabilities it may incur to the third party.

It has become bankrupt (if an individual) or (if a company) has had a
winding-up order made against it, or a resolution for a voluntary winding-up
has been passed, or a receiver or manager has been appointed, or
debenture-holders have taken possession of property subject to a floating
charge.

Before or after the bankruptcy or insolvency event in question, the insured
has incurred a liability to the third party.
Section 2(1) does not apply where a company is wound up voluntarily purely to
reconstruct or amalgamate with another company.
Generally, the rights that the third party acquires under this Ordinance are not
superior to the insured’s rights.
23
Is there a time limit outside of which the insured/reinsured is barred
from making a claim?
Under a liability policy, the insured generally has six years (Limitation Ordinance)
to issue proceedings against the insurer. Time starts to run from the date liability
is established by a judgment, arbitration award or binding settlement. However, it
is possible for the parties to agree to a shorter or longer limitation period, and the
courts generally enforce this.
24
Can the original policyholder or other third party enforce the
reinsurance contract against a reinsurer?
There is no contractual relationship between the original policyholder and the
reinsurer, so the policyholder does not acquire any contractual rights against the
reinsurer and cannot bring a contractual claim against it directly. Hong Kong has no
equivalent of the English Contracts (Rights of Third Parties) Act 1999.
25
What remedies are available for breach of an insurance policy?
Generally, insurers are entitled to damages (on proof of loss) if an insurance policy
is breached. However, if the insured has breached a condition precedent, a range
of remedies may be available to the insurer, depending on the type of condition
precedent. A condition may be a condition precedent to the:

Validity of the policy (for example, a requirement to pay the premium),
that is, the contract does not exist if the condition is not satisfied.

Inception of risk (for example, recommendations from a survey to be
implemented before coverage will attach), that is, the policy only offers
protection once the condition has been satisfied.

Insurer’s liability under the policy (for example, a requirement for the
insured to notify the insurer of a loss or claim within a specified period of
time), that is, the insurer does not incur liability for the loss or claim unless
the condition is satisfied.
A term in an insurance contract may be expressed as a warranty, that is, a term
whereby the insured promises either that a given state of affairs existed before the
commencement of the policy, or that it will continue to exist whilst the policy
remains in force. A breach of warranty discharges the insurer from liability under
the policy from the time of the breach. There is no requirement for the insurer to
demonstrate that the warranty was material to the risk insured or the loss that
may have been suffered.
INSOLVENCY
26
Please outline the regulatory framework for dealing with distressed or
insolvent insurance or reinsurance companies, or other persons or
entities providing insurance or reinsurance related services.
Except for ICO provisions relating to insolvent insurers (see below), there is no
specialist regime for dealing with insolvent insurers or insurance intermediaries.
The usual insolvency regime applies, which is similar to the English insolvency
regime (although there are a number of differences such as the absence of any
administration process for restructuring insolvent companies).
Corporate insolvencies fall within the regulatory framework established by the
Companies Ordinance supplemented by the Companies (Winding-Up) Rules. Some
provisions of the Bankruptcy Ordinance also apply. Creditors have a number of
options including:

Appointing a receiver.

Negotiating a restructuring.

Applying to the court for the appointment of a provisional liquidator or for
the court to sanction of a scheme of arrangement.

Winding up the insolvent company.
The Court of First Instance can wind up an insolvent insurer in accordance with the
Companies Ordinance, subject to the following modifications (Part VI, ICO):

The insurer may be wound up on the petition of ten or more policyholders.

The winding-up petition may not be presented except with the leave of the
court, and it cannot grant that leave unless it is satisfied that a prima facie
case for winding up has been made out, and until security for costs for the
amount the court thinks reasonable has been given.

The insolvent insurer may not be wound up voluntarily unless the court
orders otherwise, and it cannot make that order unless a copy of the
application for that order is served on the IA (with the IA being entitled to
be heard on that application and to call, examine and cross-examine
witnesses and to support or oppose the making of the order as it sees fit).

Where the petition is brought by anyone other than the IA, a copy of the
petition must be served on the IA and it has the right to be heard on the
petition and to call, examine and cross-examine witnesses and to support or
oppose the making of the winding-up order as it sees fit.
The IA can wind up an insurer in accordance with the Companies Ordinance (and
may also apply for the appointment of provisional liquidator) if either the insurer:

Is unable to pay its debt.

Has failed to satisfy its obligations under the ICO (including specifically its
obligation to keep and preserve and produce proper books of account).
The IA can petition to wind up that insurer on just and equitable grounds, but only
if it appears to the HKFI that it is expedient in the public interest for that insurer
to be wound up (section 44, ICO and sections 117 and 327, Companies Ordinance).
The other special provisions of the ICO relating to insolvent insurers are:

Section 46. The liquidator of a long-term business must carry on that
business with a view to it being transferred as a going concern to another
insurer, and may appoint a special manager for this purpose (but may not
issue any new policies).

Section 47. Where an insurance business is transferred and the transferor
or its creditors have claims against the transferee and the transferee is
wound up, the court must wind up the transferor and may appoint the same
liquidator over both.

Section 48. Where an insurer is unable to pay its debts, the court may
reduce the amount of the insurer’s contracts as it sees fit rather than
making a winding-up order.
The IA also has significant powers of intervention (see Question 13) and one of the
grounds on which it can exercise those powers is if the authorised insurer is unable
to pay its debts.
A number of funds have also been established to assist persons attempting to
recover from an insolvent insurer.
Motor Insurers’ Bureau (MIB)
The MIB (see box, Main insurance/reinsurance trade organisations) was formed to
provide compensation to traffic accident victims where the driver at fault is
uninsured or untraceable, or where the relevant insurer is insolvent. All insurers
authorised by the IA to carry on statutory motor insurance business in Hong Kong
must be MIB members. The MIB administers two funds, which are financed by levies
on the premiums for policies for compulsory motor insurance business:

The First Fund. This provides compensation to traffic accident victims who
suffer bodily injury (or their dependants if they die), but who cannot obtain
compensation because the driver at fault is uninsured or untraceable. When
motor insurers could limit third party liability, the First Fund was extended
to cover awards exceeding that limit.

The Insolvency Fund. This compensates third parties making claims for
bodily injury, death or property damage resulting from a traffic accident
where the claim remains unsettled because the insurer is insolvent.
Employees’ compensation assistance scheme
This is a statutory scheme introduced by the Employees’ Compensation Assistance
Ordinance and forms a fund administered by the Employees’ Compensation
Assistance Fund Board. The fund is built up from levies collected through premiums
paid by employers for compulsory employees’ compensation insurance. The fund
protects those employers, where their insurer is insolvent, and their employees, if
they cannot recover statutory compensation or common law damages from their
employer awarded to them by a court or tribunal of competent jurisdiction in Hong
Kong.
TAX
27
Briefly describe the tax treatment for insurers, reinsurers, and persons
or other entities providing insurance and reinsurance-related services
in your jurisdiction.
General principles
Hong Kong adopts the territorial source principle when charging tax. Generally,
only profits arising in or derived from Hong Kong are subject to Hong Kong profits
tax. Case law has established an operations test to determine whether the profits
are of Hong Kong source. If the operations giving rise to profits are in Hong Kong,
then profits are of Hong Kong source. Normal business expenses are deductible in
determining assessable profits. Profits tax is charged at the corporate tax rate
(currently 16.5%) on assessable profits. Capital receipts and dividends from
companies chargeable to Hong Kong tax are not subject to profits tax. Certain
interest income derived by non-financial institutions can also be exempt.
The Inland Revenue Ordinance (IRD) has two special provisions dealing with the
taxation of insurance business:


Section 23: life insurers. This deals with the determination of assessable
profits of life insurance operations. It only deals with profits from the life
insurance business. The profits from any other business the taxpayer
undertakes will be assessed separately according to the general principles.
It provides for two methods of assessment:
o
Calculating the assessable profits from life insurance business at 5%
of the insurance premiums of that business. These premiums
generally include all premiums received or receivable in Hong Kong
from both residents and non-residents.
o
Electing to be taxed on the adjusted surplus method. This election is
valid only if the insurer submits a certified true copy of the actuarial
report to the Commissioner not later than two years after the end of
the period for which it is made. Election is irrevocable and applies to
the years elected and all subsequent years. The adjusted surplus is
the amount by which the life insurance fund exceeds the estimated
liability of the company on that fund at the end of the period for
which the actuarial report is made (after taking into account the
surplus or deficit of that fund brought forward from the previous
period, and any adjustments made according to IRD rules). If the life
insurance funds consist of policies of which the premiums are from
life insurance business outside Hong Kong, the adjusted surplus is
apportioned according to the ratio of aggregate premiums from life
insurance business in Hong Kong to the total premiums from life
insurance business both in Hong Kong and overseas during the period
of the actuarial report. This adjusted surplus is deemed to be the
assessable profits for the years of assessment for which the actuarial
report is made. The adjusted surplus is then allocated to each year
of assessment as assessable profits for that year.
Section 23A: non-life insurers. The assessable profits of a non-life insurance
company are calculated under section 23A and assessed according to the
general principles. However, section 23A takes into account the changes in
the reserve for unexpired risks that may arise from insurance policies. Any
increase (or decrease) in the reserve in the year is deductible (or
assessable). In determining the source of the non-life insurance policies,
only polices which are made in Hong Kong or policies the proposals for
which are made to a corporation in Hong Kong are included.
If the insurer is a non-Hong Kong resident company with limited business
transactions in Hong Kong, the Commissioner may determine the assessable
profits in Hong Kong by reference to the proportion of the total profits of
the corporation corresponding to the proportion which its premiums from
insurance business in Hong Kong bear to its total premiums (or on any other
equitable basis).
Concession for qualified reinsurers
A reinsurer who derives income from the reinsurance of non-life offshore risks as a
professional reinsurer under section 23A can (irrevocably) elect to have its profits
from that reinsurance business taxed at half the normal corporate tax rate.
Insurance intermediaries
Insurance brokers and insurance agents have their assessable profits from Hong
Kong sourced operations determined and taxed in accordance with the general
principles.
DISPUTE RESOLUTION
28
Are there special procedures or venues for dealing with insurance or
reinsurance complaints or disputes in your jurisdiction?
There is no specialist insurance court or civil litigation procedure for resolving
insurance disputes. The Hong Kong International Arbitration Centre has no
specialist rules for these disputes, although it provides a list of arbitrators, some of
whom have specialist insurance knowledge.
Following an initiative launched by the Department of Justice to promote
mediation as a dispute resolution method, the HKFI has signed a Mediation First
Pledge to encourage its members to use mediation for dispute resolution before
pursuing other methods such as litigation.
The Hong Kong Mediation Council of the Hong Kong International Arbitration Centre
regulates the New Insurance Mediation Pilot Scheme (NIMPS). The aim of NIMPS is
to encourage insurance companies and injured workers to resolve personal injury
disputes in the most amicable, economic and objective manner. However, as at the
end of September 2009, only two cases have been resolved through this scheme.
29
Please give a brief overview of the main dispute resolution methods
used to settle reinsurance claims
The principal dispute resolution methods used to settle reinsurance claims are
arbitration and litigation. However, with the introduction of the Civil Justice
Reforms in April 2009, there is a greater focus on the early settlement of disputes,
particularly through mediation.
REFORM
30
Please summarise any proposals for reform of the law, regulation or
rules in your jurisdiction relating to the provision of insurance or
reinsurance services.
Regulatory regime
There have been a number of reform proposals of the regulatory regime over the
past few years including:

Establishing the IA as an independent regulatory body outside the civil
service.

Forming a super regulator amalgamating the functions of the SFC, the IA,
the MPF Schemes Authority and the Hong Kong Monetary Authority (which
regulates Hong Kong banks) similar to the Financial Services Authority in the
UK or the Monetary Authority of Singapore.
Following the recent economic crisis, the IA has held a series of meetings with
general and life insurers to discuss possible regulatory regime changes. The HKFI is
concerned that a super-regulator would wield excessive power, but supports a
“twin-peaks” structure, with one regulator overseeing market conduct and another
providing prudent supervision of the industry, as adopted in Australia. This model
has been highly praised as the most effective regulatory regime during the recent
economic crisis.
Policyholders’ protection fund
The HKFI supports the establishment of a policyholders’ protection fund (PPF) to
provide a safety net for individual policyholders (but excluding compulsory business
already covered by the MIB and the Employees’ Compensation Insurer Insolvency
Bureau) by underwriting payments under their insurance policy if their insurer is
insolvent. The fund (probably separate funds for general and life insurance) would
be based on similar compensation schemes operating in the UK, Canada and
Singapore and would be funded by a levy on premiums. The current proposal is for
the PPF to provide compensation capped at a maximum compensation payment of
HK$1 million (about US$129,000) for both:

100% of the first HK$100,000 (about US$12,900) of the benefits payable
under the policy.

80% of the balance.
The IA is conducting an actuarial study to establish the target fund size and optimal
levy rate. It plans to finalise the details of the PPF by the end of 2010 and to
introduce the draft legislation in 2011.
Healthcare
The current public healthcare system is state funded and heavily subsidised, and is
becoming an increasing financial burden on the government. Many people take out
private healthcare insurance (if affordable). The government is therefore carrying
out a consultation exercise on reforming public healthcare financing. The HKFI
supports a supplementary financing model made up of three elements:

A progressive, measured increase in user fees for public healthcare designed
to achieve cost sharing.

Encouraging individuals to take out voluntary private insurance as an
interim measure.

In the long term, setting up a mandatory insurance scheme based on
contributions from the Hong Kong working population.
To promote using private healthcare services, the HKFI is also trying to persuade
the government to introduce tax incentives such as tax rebates on medical
expenses and private medical insurance premiums.
Richard Bates
Kennedys
www.kennedys-law.com/rbates
*The author would like to thank Rex Ho, Partner in Tax Services at
PricewaterhouseCoopers Limited, Hong Kong for contributing the response to
Question 27.
This chapter was first published in the PLC Cross-border Insurance and Reinsurance
Handbook 2010 and is reproduced with the permission of the publisher, Practical
Law
Company.
For
further
information
visit
www.practicallaw.com/insurancehandbook
MAIN INSURANCE/REINSURANCE TRADE ORGANISATIONS
Hong Kong Federation of Insurers (HKFI)
Main activities. The principal industry body undertaking a large degree of
self regulation of that industry.
W www.hkfi.org.hk
Insurance Agents Registration Board (IARB)
Main activities. The dual role of registering qualified insurance agents,
responsible officers and technical representatives and handling complaints
against them.
W www.hkfi.org.hk
Hong Kong Confederation of Insurance Brokers
Main activities. An IA-approved body of insurance brokers implementing the
self-regulation of insurance brokers in Hong Kong.
W www.hkcib.org
Professional Insurance Brokers Association
Main activities. An IA-approved body of insurance brokers implementing the
self-regulation of insurance brokers in Hong Kong.
W www.piba.org.hk
Motor Insurers’ Bureau (MIB)
Main activities. Securing the satisfaction of claims in relation to liability for
death or bodily injury arising from the use of motor vehicles required to be
covered by the Motor Vehicles Insurance (Third Party Risks) Ordinance.
W www.mibhk.com.hk