Hong Kong regulatory insurance update September 2024

Insurance Authority (IA) publishes revised guideline on group supervision

5 July 2024

The IA has revised the Guideline on Group Supervision (Revised GL32) in view of the enactment of the Insurance (Amendment) Ordinance 2023 (Amendment Ordinance). The Revised GL32 came into effect on 5 July 2024.

What are the major changes to GL32?

1. Classification of majority and minority shareholder controllers of designated insurance holding companies (DIHCs)

The Revised GL32 sets out the requirements under Part XIA of the Insurance Ordinance (IO) for:

• obtaining prior approval from the IA where a minority shareholder controller of a DIHC intends to become a majority shareholder controller of the same DIHC;
• notification to the IA when a majority shareholder controller of a DIHC becomes a minority shareholder controller.[1]

2. Elaboration on the “fit and proper” criteria for shareholder controllers[2]

The IA assesses the competence and capability of individuals acting as shareholder controllers, directors or key persons in control functions. This assessment will take into account any past failures to uphold professional and ethical standards of any relevant professional body. The IA will determine if such failures impact the individual's fitness and propriety after considering the nature and seriousness of the non-compliance and the time that has passed since the non-compliance issue.

When assessing the fitness and propriety of a shareholder controller, the IA evaluates their likely or actual level of influence and control over a DIHC. Generally the higher level of influence will lead to stricter standards applied by the IA in assessing fitness and propriety.

The IA also expects a shareholder controller to possess knowledge, experience, competence, sound judgment, diligence, integrity, and commitment to the development of the DIHC and its supervised group.

A prospective majority or minority shareholder controller should submit clear and detailed strategic objectives and business plans of the supervised group of the DIHC and show that these objectives and plans are realistic, viable, and conducive to the long term stability of the supervised group. The majority shareholder controller, in particular, should demonstrate its long term commitment and that it has the financial capacity to maintain the financial soundness of the supervised group, including the ability to provide additional capital when needed.

3. The Revised GL32 has amended certain existing factors and included additional factors relevant to:

• in the case of an individual, the assessment of not only integrity but also reputation, character, reliability, honesty, and ability to act fairly of that individual;[3]
• in the case of a body corporate, the assessment of its fitness and propriety, including whether it has been untruthful to or provided false or misleading information to or has been subject to adverse comment from any regulatory authority in Hong Kong or elsewhere, whether it has sound corporate governance structure and adequate internal control systems and procedures in place, whether it maintains effective risk management systems and the adequacy of internal controls on financial reporting.[4]

Moreover, where a body corporate intends to become a majority shareholder controller of a DIHC, the IA will also consider whether the body corporate is under any prudential supervision by any regulatory authority in Hong Kong or elsewhere. [5]

4. Clarifications as to the IA’s expectation of a director of a DIHC to be considered as an independent non-executive director (INED)[6]

The IA is not likely to be satisfied that a director is an INED of a DIHC if the director, for example:

• is/has been an employee of the DIHC or its supervised group in the last three years;
• is a director (other than an INED) of a company within the supervised group;
• is a controller of the DIHC or its supervised group; or
• is an associate (as defined under section 95A(1) of the IO) of a director or controller in the supervised group.

Download the IA Circular (GL32) PDF

Practice Note issued by IA in respect of Broker Services provided in relation to Investment-Linked Assurance Scheme Policies (ILAS Policies)

5 July 2024

The IA has issued a Practice Note, effective from 1 October 2024, regarding the application of regulatory requirements on specific services provided by licensed insurance brokers (Licensed Brokers) on investment choices and premium allocations under ILAS Policies (Practice Note).

The Practice Note outlines the standards which have to be met by a Licensed Broker (and its personnel) to comply with the regulatory framework concerning three specific types of regulated activities:

• execution-only services;
• advisory investment services; and
• discretionary investment management services.

Competence requirements for technical representatives (broker) (TRs) and responsible officers (RO) of Licensed Brokers

The IA requires personnel providing advisory investment services and/or discretionary investment management services to meet specific qualification and experience requirements (as set out in Annex A to the Practice Note) for all ILAS Policies issued on or after 1 October 2024.

There are grandfathering arrangements for ILAS Policies issued before 1 October 2024 which allow these services to continue to be provided until 31 July 2027, provided that the relevant TRs and ROs comply with additional CPD requirements. By 1 August 2027, all personnel must comply with the competence requirements to continue to provide those services.

Minimum expectations on corporate governance and controls and procedures

Annex B to the Practice Note also sets out the IA’s minimum expectations on the corporate governance, controls, and procedures that a Licensed Broker (and its RO) should implement on the specific services in relation to ILAS Policies.

When providing these services to policyholders, Licensed Brokers and their ROs must ensure that policyholders are provided with full transparency on:

• the terms and conditions of the services;
• the terms and level of remuneration and fees; and
• the fact that services can be terminated without penalty.

Policyholders should also be made aware that these services and their associated fees are not part of the ILAS Policy's key features. This is to ensure that they can make a fully informed decision as to whether to proceed with procuring such services.

Download the IA Circular

Hong Kong Federation of Insurers (HKFI) launches reference checking scheme for insurance intermediaries

5 July 2024

HKFI has launched a reference checking scheme for insurance intermediaries (Reference Checking Scheme) to be used by authorised insurers carrying on long term business (Long Term Insurers), effective from 1 September 2024.

If a Long Term Insurer (Recruiting Insurer) seeks to appoint a prospective agent and is aware that the candidate has previously been appointed as an insurance agent by any other Long Term Insurer (Responding Insurer) in the past seven years, the Reference Checking Scheme requires the Recruiting Insurer to carry out reference checking on the candidate (using a standard template) with the relevant Responding Insurers before proceeding with the appointment. There is a specified pre-agreed timeframe for a Responding Insurer to respond.

The Recruiting Insurer has full discretion in deciding whether to proceed with the appointment even if adverse information is disclosed via the reference checking mechanism. If adverse information is disclosed during the reference checking but the Recruiting Insurer proceeds with the appointment:

• the Recruiting Insurer must document its assessment;
• the assessment must be reviewed by the Recruiting Insurer’s key person in control function for intermediary management; and
• the assessment must be made available upon the IA’s request (whether during a regulatory inspection or part of the IA’s ongoing supervision).

IA’s supervisory approach

If a Long Term Insurer does not participate in, or repeatedly fails to discharge its obligations under, the Reference Checking Scheme, the IA may consider this indicative of systemic weakness in the Long Term Insurer’s internal control measures. As a consequence, the Long Term Insurer can expect increased scrutiny from the IA on:

• the adequacy of its recruiting and on-boarding controls;
• the fitness and properness of the responsible management; and
• new and renewal licensing applications of its insurance agents.

The Reference Checking Scheme will only cover individual insurance agents carrying on long term business. However, the Reference Checking Scheme may also extend to other types of insurance intermediaries at a later stage once sufficient experience of the practical operation of the Reference Checking Scheme has been gained.

• Download the IA Circular (Reference Checking Scheme)
• Read the Insurance Asia article >

IA to start charging fees for insurance intermediary licensing applications after the expiry of the 5-year waiver period

31 July 2024

Since 23 September 2019, all licensing and related fees payable by insurance intermediaries have been waived for a five year period. From 23 September 2024 onwards, the IA will start charging fees for processing insurance intermediary licence applications and related notifications.

Individual licensees, licensed insurance agencies and insurance broker companies will have to pay fees for applications for new licence, licence renewal and for adding a line of business to an existing licence. Fees are also payable for applications for approval of a RO (for insurance agencies and insurance broker companies) and other notifications/applications (such as notifications of new appointment of principal and exemption applications under section 79 of IO).

These fees have been implemented through amendments to the Insurance (Prescribed Fees) Regulation (Cap. 41B).

Mr. Peter Gregoire, the IA’s Head of Conduct Supervision Division and General Counsel, believes the additional income will sustain the IA’s capacity to “administer and continually improve [its] technology-based licensing process, embark on new public education campaigns that promote the importance of insurance and empower consumers to make fully informed insurance-buying decisions, offer training to insurance practitioners, and take proportionate enforcement actions that reinforce the integrity of the insurance market.”

A new payment gateway function in the IA’s e-portal, Insurance Intermediaries Connect (IIC) has been developed to facilitate payment of the fees.

• Download the IA Circular
• Download the Annex 1 and Annex 2
• Read the Insurance Asia article >

Commencement of the Risk-based Capital regime for the Hong Kong insurance industry

1 July 2024

The Risk-based Capital (RBC) regime came into effect on 1 July 2024. The IA anticipates that the new regime will “strengthen the financial soundness of insurers in Hong Kong by taking a modular approach for an assessment more sensitive to each insurer’s risk profile while providing closer alignment with international standards”. Other major changes introduced by the Amendment Ordinance were outlined in our April 2023 and July 2023 updates.

According to a credit analyst of S&P Global Ratings, the RBC regime “will better reflect insurers’ risk profiles, especially regarding investment risks […] Such a risk-sensitive solvency mechanism could lead to updates in investment and product strategies, as insurers seek more efficient capital utilization.”

The RBC regime will also necessitate closer monitoring of interest rate risks and investment market volatilities, influencing insurers’ capitalisation strategies and product offerings.

• Read the Insurance Asia Hong Kong begins risk-based capital regime for insurers >
• and Insurance Asia HK insurers may need capital boosts due to new rules >
• Read the to Asia Insurance Review >

IA joins the industry in welcoming the release of consultation conclusion and legislative proposals by the Government on introduction of a company re-domiciliation regime

3 July 2024

The IA welcomes the release of the consultation conclusion and legislative proposals by the Government of the HKSAR on the introduction of a company re-domiciliation regime.

Mr Clement Cheung, the IA’s Chief Executive Officer, pointed out that the insurance sector has been calling for a regime that enables offshore companies with significant local presence to relocate their headquarters back to Hong Kong seamlessly. The re-domiciliation regime is expected to simplify administrative procedures, cut down legal costs and reduce the lead time for offshore companies to complete the re-domiciliation without disrupting their business operations. This will facilitate the insurance groups’ expansion within the Greater Bay Area while bolstering Hong Kong’s ‘headquarters economy’.

The growing popularity in the use of autonomous driving technology and electric vehicles (EVs) will introduce new risks and challenges for insurers underwriting EV insurance policies. 

According to Vinay Surana, regional managing director for the Asia Pacific, Middle East, and Africa at Allianz Partners, it is anticipated that one of the primary changes will be a shift in risk from the driver to the technology provider, such as the Original Equipment Manufacturer (OEM), software provider, or network infrastructure provider.

“Currently, insurance focuses on the driver’s behaviour — how they drive, their speeding habits, braking, and driving history are the primary factors in determining insurance rates. In the future, as technology drives the vehicles, these considerations will become less relevant, and the risk will shift to the technology providers.”

Issues such as battery warranties and wall box charging unit installations will also introduce new risks that insurers will need to address.

“With an EV, when you install a wall box, that gas station is at your home. This introduces liability risks - if you live in a high-density building, improperly installing a wall box charger and wiring from your house could potentially cause a fire and burn down the building”.

Although there will be fewer claims due to autonomous vehicles reducing incidents caused by driver error, the severity of claims may increase due to the high cost of repairing advanced technology. The higher repair costs for EVs have been highlighted by extreme weather events such as the typhoon and heavy rainstorm in September 2023 which led to HK$1.9 billion in insurance claims.

Surana also warned that, in a connected environment where cars are driven autonomously with a reliance on network and technology to drive the vehicle, there may also be potential for cyber threats.

To prepare for the changes in the management and evaluation of claims, insurers will need to retrain their claims personnel and reconsider liability coverage. It will also be important to establish a robust data connection with OEM providers and extract insights from data gathered from OEM providers.

• Read the Insurance Asia article HK's new legislation welcomed by insurance industry >
• Read the Asia Insurance Review Hong Kong: Insurance regulator backs government's company re-domiciliation proposals >

Insurers warn of risks in evolving motor insurance sector

8 August 2024

The growing popularity in the use of autonomous driving technology and electric vehicles (EVs) will introduce new risks and challenges for insurers underwriting EV insurance policies. 

According to Vinay Surana, regional managing director for the Asia Pacific, Middle East, and Africa at Allianz Partners, it is anticipated that one of the primary changes will be a shift in risk from the driver to the technology provider, such as the Original Equipment Manufacturer (OEM), software provider, or network infrastructure provider.

“Currently, insurance focuses on the driver’s behaviour — how they drive, their speeding habits, braking, and driving history are the primary factors in determining insurance rates. In the future, as technology drives the vehicles, these considerations will become less relevant, and the risk will shift to the technology providers.”

Issues such as battery warranties and wall box charging unit installations will also introduce new risks that insurers will need to address.

“With an EV, when you install a wall box, that gas station is at your home. This introduces liability risks - if you live in a high-density building, improperly installing a wall box charger and wiring from your house could potentially cause a fire and burn down the building”.

Although there will be fewer claims due to autonomous vehicles reducing incidents caused by driver error, the severity of claims may increase due to the high cost of repairing advanced technology. The higher repair costs for EVs have been highlighted by extreme weather events such as the typhoon and heavy rainstorm in September 2023 which led to HK$1.9 billion in insurance claims.

Surana also warned that, in a connected environment where cars are driven autonomously with a reliance on network and technology to drive the vehicle, there may also be potential for cyber threats.

To prepare for the changes in the management and evaluation of claims, insurers will need to retrain their claims personnel and reconsider liability coverage. It will also be important to establish a robust data connection with OEM providers and extract insights from data gathered from OEM providers.

Read the Insurance Asia article

Hong Kong insurance market remains ‘soft’ in the second quarter of 2024

31 August 2024

AON’s Q2 2024 Global Insurance Market Insights Report reveals that:

• Hong Kong’s insurance market was generally ‘soft’ but remains pressured by social and economic inflation;
• pricing remained generally competitive due to increased competition for new business;
• capacity was ample for most risks while preferred risks were often over-subscribed;
• underwriting was prudent across much of the market as underwriters sought to differentiate risk quality, offering favourable terms mostly to preferred risk types;
• underwriting remained flexible for casualty/liability and directors and officers due to healthy market competition;
• automobile insurance remained moderate, with more insurers covering electric vehicles;
• healthy competition in relation to casualty/liability insurance led to downward pressures in pricing, although modest increases continued for some local and multinational programs;
• market’s underwriters focused on well-performing risks and offered favourable pricing and coverage terms for such risks;
• the cyber market was characterised by healthy appetite and competition;
• the market for directors and officers insurance continued to soften as competition increased, driven by sufficient market capacity in an environment with few growth opportunities for insurers;
• property insurance remained competitive with ample capacity generally available and its pricing remained favourable for well-performing risks; and
• multinational programs experienced a more moderate environment, with natural catastrophe-exposed risks driving technical pricing considerations

Read the Business Insurance article Hong Kong’s insurance market remains soft in second quarter

IA releases provisional statistics of Hong Kong insurance industry for the first half of 2024

30 August 2024

The IA has released provisional statistics for the Hong Kong insurance industry for the first half of 2024. Total gross premiums increased by 5.1%, to HK$310.9 billion, when compared to the same period in 2023.

Below is a summary of statistics from January to June 2024, with the year-on-year changes represented by the percentage figures shown in brackets.

Long term business

	Revenue Premiums	New Office Premiums
Individual Life and Annuity (Non-Linked) business	HK$243.3 billion (+6.9%)	HK$111.3 billion (+15.5%)
Individual Life and Annuity (Linked) business	HK$10.7 billion (-16%)	HK$4.3 billion (-34.7%)
Retirement Scheme business	HK$15.1 billion (+1.9%)
New office premiums (excluding Retirement Scheme business)		HK$115.9 billion (+12.3%)
Total revenue premiums of in-force long term business	HK$273 billion (+5.5%)
Total claims and benefits paid to policyholders	HK$183.6 billion (+18.2%)

General business

	Direct Business	Reinsurance Inward Business	Overall General Business
Gross premiums	HK$27.8 billion (+3.2%)	HK$10.1 billion (+0.4%)	HK$37.9 billion (+2.4%)
Net premiums	HK$19 billion (+2.1%)	HK$5.4 billion (+16.8%)	HK$24.4 billion (+5%)
Total gross claims	HK$13.3 billion (+9.9%)	HK$4.0 billion (+28.4%)	HK$17.3 billion (+13.7%)
Overall underwriting profit	HK$1.4 billion (+95.4%)	HK$0.6 billion (-23%)	HK$1.9 billion (+33.9%)

• Download the summary of Provisional Statistics
• Read the IA Statistics

References

[1] Module B/B.S/1.1 to 1.2 of Revised GL32

[2] Module B/B.S/2.3 to 2.6 of Revised GL32

[3] Module B/ B.S/2.10 of Revised GL32, in particular sub-paragraphs (d), (h), (i), (j) and (k)

[4] Module B/ B.S/4.1 of Revised GL32, in particular sub-paragraphs (j) to (n)

[5] Module B/ B.S/4.3 of Revised GL32

[6] Module G/G.S/7.2 of Revised GL32