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In this Summer 2024 edition of Regulatory Insurance Update, our Hong Kong Corporate and Commercial Team provide the latest updates relating to the law and regulations, developments, and news in the insurance industry in Hong Kong.
Updates on insurance law and regulations
22 May 2024
The Insurance Authority (IA) has issued a circular addressing non-compliant business models adopted by licensed insurance broker companies (Brokers) relying on unlicensed persons to perform regulated activities.
The common features of these business models are:
- Engagement of unlicensed referrers (Referrers) to carry on regulated activities on the Broker’s behalf to source clients, often from Mainland China, to purchase long-term insurance policies with savings and investment elements;
- Payment of inordinately high referral fees to Referrers;
- Referrers using prohibited rebates to clients to induce them to purchase long-term insurance policies;
- Inadequacies in the Broker’s compliance operations where technical representatives are nothing more than “rubber-stamps” (or “signing TRs”) who spend limited time with the client and provide no post-sales ongoing servicing;
- Clients being required by the Broker and its TRs to confirm to the insurer that all regulated activities were carried on by the Broker in Hong Kong (when this is not the case), thereby circumventing the insurer’s controls.
The IA reinforces the following messages:
- A Broker seeking to rely on unlicensed persons must ensure that the referral model it adopts complies with the following principles:
- Unlicensed Referrers must not give regulated advice to clients and must not carry on any regulated activities or sales activities;
- Regulated advice must only be given to clients by the Broker (and its TRs) who must carry on all regulated activities needed to arrange insurance policies for the clients to the minimum standards required under the Insurance Ordinance (IO), rules, codes, guidelines and circulars issued by the IA (collectively the Insurance Regulatory Framework);
- Any payments offered by the Broker to Referrers for introducing clients should be calibrated to be consistent with:
- the Referrers not carrying on regulated activities (and not being incentivised to do so); and
- the Broker being properly resourced to provide regulated advice and perform regulated activities for the clients being introduced.
Brokers failing to comply with the above principles can expect to have their licence revoked and be subject to criminal investigation and proceedings.
- Authorised insurers must ensure that arrangements for referred insurance business comply with the requirements of the Insurance Regulatory Framework.
- Rebates of premium and commission on long-term insurance products are subject to the prohibitions under the IA’s Guideline on Offering of Gifts (GL25), with the exception of rebates recorded in the insurance policy, policy schedule, quotation, offer letter or promotional material (the terms of which are incorporated by reference into the insurance policy).
- Authorised insurers must ensure that their remuneration structures for long-term insurance products do not incentivize intermediaries to engage in mis-selling and aggressive selling.
- The senior management of Brokers and authorised insurers are responsible for implementing controls and processes to comply with the Insurance Regulatory Framework. Non-compliance with the IO may result in personal criminal liability and disciplinary action for Controllers, directors, responsible officers and key persons in control functions.
12 June 2024
The Insurance Authority (IA) has issued a circular which provides guidance for the implementation of the Insurance (Valuation and Capital) Rules (Cap. 41R) (RBC Rules).
Minimum requirements for stochastic simulation approach
According to rule 19(2), an applicable insurer must use a stochastic simulation approach in calculating the time value of options and guarantees under groups of contracts of insurance which include contractual options or financial guarantees.
The economic scenario generator adopted to produce the potential future scenarios must meet several minimum requirements, such as the number of economic scenarios. It should also consider several factors, including all material financial risks and an interest rate model.
Simplified approaches for the calculation of matching adjustment
According to rule 24(6), an applicable insurer which has practical difficulty in performing a full calculation of the matching adjustment may consider taking any or all of the simplified approaches allowed by the IA including:
- adopting a proxy application ratio of 15% on entity level for all match adjustment portfolios and under all risk capital amount scenarios;
- adopting additive proxy of 25% for an increase in accumulated cash flow shortfall percentage under lapse up and mass lapse scenarios for the predictability factor calculation; and
- using policy data within one month before valuation date for the predictability factor calculation.
Approval for using own assessment approach in determining the risk capital amount for natural catastrophe risk
According to rule 67, an applicable insurer must determine its risk capital amount for natural catastrophe risk using the factor-based approach in accordance with rule 68, unless it has obtained the IA’s approval to use its own assessment to determine such risk capital amount.
An applicable insurer can therefore apply for the IA’s approval, provided it can demonstrate to the IA’s satisfaction that its proposed own assessment approach satisfies the relevant principles set out in Section 2 of Appendix 3 to the circular.
14 June 2024
Given the enactment of Insurance (Amendment) Ordinance 2023, the IA has published the following guidelines which came into operation on 1 July 2024:
- a revised Guideline on Actuarial Review of Insurance Liabilities in respect of General Business (GL9); and
- a new Guideline on Establishment and Maintenance of Fund(s) in respect of Participating Business (GL34).
Revised GL9
GL9 has been revised to provide guidance on the scope, assumptions and methodologies to be used for the actuarial valuation of general insurance liabilities to be conducted pursuant to section 18A(1) of the Insurance Ordinance (Cap.41) (IO). It also specified the scope and content of the actuarial report and actuarial certificate for such valuation, and their submission requirements.
New GL34
GL34 details the IA’s expectations for sound and prudent business practices to be implemented and complied with by authorized insurers in establishing and maintaining funds in respect of participating business, pursuant to section 21B of the IO.
The areas covered include:
- the identification of assets and liabilities;
- determination of the opening balance;
- allocation of expenses and charges;
- allocation of distributable surplus/profits;
- capital support;
- physical segregation of assets; and
- an independent report of the establishment of participating funds.
21 June 2024
The IA has explained the application of the countercyclical adjustment (CCA) for purposes of rule 49(2)(a)(iii) of the RBC Rules, which came into operation on 1 July 2024.
Pursuant to rule 49(2)(a), the adjusted equity downward stress factor is the sum of the equity downward stress factor prescribed in Table 5 under the same rule and the most recent CCA to be specified by the IA from time to time in determining the risk capital amount for equity risk.
The IA will conduct a review study on the CCA, including an analysis of industry equity portfolios reflecting market dynamics and risk exposures. During the interim period before the conclusion of the study, applicable insurers can elect, by notification to the IA, to either:
-
- adopt the CCA which will be specified by the IA from time to time for optional adoption (based on the “CCA Generation Tool” specifications dated 9 July 2021); or
- set the CCA at zero.
Insurance industry news and developments
6 May 2024
The International Bank for Reconstruction and Development of the World Bank Group issued and listed a catastrophe bond at US$150 million (equivalent to about HK$1.17 billion) in Hong Kong. The bond is aimed at offering protection against storm risks in Jamaica.
The IA has welcomed this issuance of insurance-linked securities. Mr. Clement Cheung, CEO of the IA, said, “Going forward, we will dedicate efforts to forging an ecosystem that nourishes institutional investors, data modelling capabilities and professional talents.”
The World Bank, represented by Mr. Jorge Familiar, its Vice President and Treasurer, regards this catastrophe bond as “another example of how developing countries can mitigate disruptive economic impacts brought by natural disasters.”
This marks the fifth ILS issuance in Hong Kong since the bespoke regulatory regime and pilot grant scheme were introduced in 2021. The five ILS issuances to date total US$713 million (equivalent to about HK$5.59 billion).
Link to Insurance Business article
Link to Asia Insurance Review article
31 May 2024
The IA has released provisional statistics for the Hong Kong insurance industry for the first quarter of 2024. Total gross premiums rose by 12.2% to HK$165.1 billion, compared to the same period in 2023.
Below is a brief summary of the statistics from January to March 2024, with year-on-year changes shown in brackets.
Long-term business
|
Total revenue premiums of in-force long term business |
HK$144.3 billion (+14%) |
|
Total claims and benefits paid to policy holders |
HK$101.8 billion (+29.6%) |
|
New office premiums (excluding Retirement Scheme business) |
HK$65.3 billion (+39%) |
According to a South China Morning Post article, the recent boost in life insurance sales is attributable to HSBC Life issuing the world’s most valuable life insurance policy with a protection value of US$250 million, and the soaring demand from Mainland Chinese visitors. Sales to Mainland Chinese visitors accounted for HK$15.6 billion of the total sales, which is even higher than the pre-COVID level of HK$12.8 billion as at the first quarter of 2019.
General business
|
|
Direct business |
Reinsurance inward business |
General insurance business |
|
Gross premiums |
HK$15.3 billion (+2.6%) |
HK$5.5 billion (-3.7%) |
HK$20.8 billion (+0.9%) |
|
Net premiums |
HK$10.3 billion (+2.4%) |
HK$2.8 billion (+17.7%) |
HK$13.1 billion (+5.3%) |
|
Overall underwriting profit |
HK$0.6 billion (+61.8%) |
HK$0.4 billion (+225.2%) |
HK$1 billion (+102.3%) |
Link to IA’s summary of the provisional statistics
Link to IA’s provisional statistics on Hong Kong General Insurance Business (January to March 2024)
4 June 2024
According to a survey conducted by Schroders, the COVID-19 pandemic has led to Hong Kong residents starting their retirement planning at a younger age, with the average age dropping from 45 in 2018 to 40 in 2024.
Nearly half of those surveyed said they feel the urgency to save for potential healthcare needs after retirement more strongly now than pre-Covid era.
The top three retirement-related concerns among the respondents were:
- higher healthcare costs than expected (76%);
- inflation reducing the value of assets (73%); and
- a potential prolonged recession affecting their life and career (72%), which may have an impact on their ability to accumulate wealth for retirement.
Moreover, it is common for Hongkongers to underestimate the longevity effect. The respondents expect only 15 years of post-retirement on average whilst the actual figure is 22 years. The survey also highlighted an average HK$2.4m gap between desired financial reserves for retirement and expected expenditure. They therefore run the risk of outliving their assets.
7 June 2024
The Manulife Asia Care survey revealed that Hong Kong residents perceive rising healthcare costs as their main financial concern. Around 69% of the respondents identified the city’s rising health costs as a barrier to financial well-being, with healthcare expenses perceived to have risen by 18% over the past year. The increase includes outpatient services (22%), drugs (15%), and preventive healthcare (14%).
"Given the escalating healthcare costs and resulting financial stress, combined with the prevalence of mental health concerns, it is important for people in Hong Kong to reconsider their approach to holistic well-being. […]
As a steadfast advocate of the 'mind-body wealth' concept, which stresses the importance of achieving balance in financial, mental, and physical aspects of well-being for a healthier and more fulfilling life, we are dedicated to improving the overall well-being of Hong Kong people across these aspects,” said Patrick Graham, Chief Executive Officer, Manulife Hong Kong and Macau.
The survey demonstrated a significant confidence gap among Hong Kong residents between their financial, mental and physical well-being for the next decade. This gap highlights the need for an integrated approach to personal health, which caters for balancing financial stress, emotional health and physical wellbeing.
The survey also showed a heavy reliance on cash savings for financial goals, with 63% of respondents preferring this method over investment products. Against the backdrop of aging population and rising healthcare costs, it appears that long-term investments or retirement plans might be more effective in achieving financial goals.
“An effective way to deal with rising medical costs lies in health protection tailored to specific needs and budgets. We see gaps between levels of protection and levels of health concern. Seeking financial advice is a good way to close that gap,” said Manulife Asia president and CEO Phil Witherington.
Link to Manulife Asia Care Survey
Link to Insurance Asia article
Insurance and reinsurance
Hong Kong