Lift-Off - An Independent Insurance Authority for Hong Kong

The Hong Kong independent Insurance Authority (“IA”) will replace the Office of the Commissioner of Insurance (“OCI”) on 26 June 2017 (“D-day”) when it will take over the statutory functions of OCI.

The Hong Kong independent Insurance Authority (“IA”) will replace the Office of the Commissioner of Insurance (“OCI”) on 26 June 2017 (“D-day”) when it will take over the statutory functions of OCI. The second stage of a three stage regulatory reform process has, therefore, now begun. These are the most significant regulatory reforms to the insurance industry in Hong Kong for 20 years.

It is expected that work will be completed in the following 24 months on an action plan to implement a transfer of powers and data from the present intermediary self-regulatory bodies (“SROs”) to the (new) IA, which constitutes the final phase of the reform (the third stage). A spokesman for the Financial Services and the Treasury Bureau noted that:

“The existing self-regulatory system for insurance intermediaries will continue in the meantime, allowing time for the IA to prepare the necessary tools, such as guidelines on conduct, for regulating insurance intermediaries. The IA is expected to take over the supervision of insurance intermediaries from the three SROs within two years from the D-day”.

The IA previously confirmed that the existing codes and guidelines promulgated by the Hong Kong Federation of Insurers on the standards of conduct for insurers will continue to have effect. Existing guidance notes promulgated by OCI will also continue to have effect (subject to technical amendments only), but guidance on fit and proper criteria (GN4 will be revised to GL4) and on pecuniary penalties (a new GL18) will subject to further updates by the IA.

Updates to Schedules 2 to 6 of the Insurance Ordinance and the existing subsidiary legislation set out below will all come into effect on D-day:

1. Insurance Companies (Actuaries' Qualifications) (Amendment) Regulation 2017;
2. Insurance Companies (Register of Insurers) (Prescribed Fee) (Amendment) Regulation 2017;
3. Insurance Companies (Authorization and Annual Fees) (Amendment) Regulation 2017;
4. Insurance Companies (Determination of Long Term Liabilities) Regulation (Amendment) Rules 2017;
5. Insurance Companies (Margin of Solvency) Regulation (Amendment) Rules 2017;
6. Insurance Companies (General Business) (Valuation) Regulation (Amendment) Rules 2017;
7. Insurance Companies (Actuaries' Standards) Regulation (Amendment) Rules 2017; and
8.Insurance Ordinance (Amendment of Schedules) Notice 2017.

In addition, the Insurance Companies (Amendment) Ordinance 2015 (Commencement) Notice 2017 will on D-day implement a majority of the provisions of the Insurance Companies (Amendment) Ordinance 2015 (“ICAO2015’) (except for provisions concerning insurance intermediaries). This will include provisions relating to:

  • Key persons in control functions / controllers / directors
  • Regulatory powers including disciplinary powers and pecuniary penalties
  • The Insurance Appeals Tribunal

Who are key persons in control functions?

ICAO2015 provides for the regulation of certain individual as key persons in control functions. These are persons holding positions that are likely to exercise a significant influence on the insurer’s business. Relevant key persons are those performing risk management, financial control, compliance, internal audit, actuarial and intermediary management functions. An authorised insurer will only be able to appoint an individual as a key person in a control function if that individual is fit and proper and approved by the IA. That approval can also be revoked. These approval provisions (except for the intermediary management function) will become effective on D-day.

How will the IA levy pecuniary penalties?

The IA may impose pecuniary penalties on insurers and insurance intermediaries (including responsible officers and persons of insurance intermediaries concerned in the management of their regulated activities) for any misconduct and for any approved persons who failed to meet the criteria of “fit and proper”. These can be as much as the greater of HK$10,000,000 or three times the amount of the profit gained or loss avoided by the insurer or the intermediary. The provisions relating to insurers will become effective on D-day with those relating to intermediaries coming in at a later date.

When imposing penalties the IA will need to take into account certain guidelines. These are to be published in the Government Gazette and could follow the form used elsewhere in the financial services industry. In the event of a breach of the law, IA could require the following details: (i) the nature, severity and impact of the relevant misconduct or failure of fitness and propriety (“relevant breach”); (ii) the insurer’s conduct in response to the relevant breach (remediation or concealment), (iii) any prior relevant breach; and (iv) the financial consequences of the relevant breach in question.

The Insurance Appeals Tribunal

ICAO2015 provides for the establishment of the Insurance Appeals Tribunal (“IAT”) which will review specified decisions of the IA, including those on authorisation, licensing and disciplinary actions; and determine questions or issues arising out of or in connection with a review. The IAT is a quasi-judicial body independent of the IA, established in order to ensure that there are adequate checks and balances on the IA’s exercise of its powers. An application to the IAT for a review of a decision of the IA must be brought in writing within 21 days after that decision. The IAT is empowered to confirm, vary or set aside the decision; or remit the matter to the IA with such directions as it considers appropriate. It also has the discretion to award costs. 

ICAO2015 also provides that the IAT may, with the consent of both parties to the review, determine that review based only on written submissions. This procedure allows appellants to choose a less expensive and cumbersome alternative. The provisions relating to insurers will become effective on D-day with those relating to intermediaries to follow later.

Levies and fees

Existing fees will be adjusted and new fees that will apply from D-day onwards will include:

  • the application fee for approval of the appointment of a controller (e.g. a Managing Director or CEO), a director, or a key person in control functions will be HK$18,000 per appointment;
  • the notification fee for the appointment of other controllers, other directors, or other key persons in control functions will be HK$5,000 per appointment;
    a new notification fee to propose a person to become a controller (i.e. a person who alone or with any associate has 15% or more of the voting power at any general meeting of the insurer) will be levied at HK$100,000 if the person has 50% or more of the voting power at any general meeting, or HK$50,000 if the person has less than 50% of the voting power;
  • the initial authorisation fee to conduct either long term or general insurance business will now be the sum of (a) a fixed amount at HK$300,000 (different fixed fees for composite and captive insurers) and (b) a variable fee derived from multiplying the insurance liabilities by a variable fee rate (currently at 0.0001% for the period between D-day and 25 June 2018) that is capped at HK$7 million. The variable fee rate will increase incrementally every year to a maximum of 0.0039% for the year 2022/2023 onwards;
  • the subsequent annual fee for long term or general insurance business authorisation will be calculated in the same manner as the authorisation fee above.

What you should do next

Some practical matters insurers should consider include:

  • Implementing revised compliance policies and internal controls to facilitate:
  • compliance with the new requirements including for example the “fit and proper” assessments of relevant officers
  • the ability to respond to the IA’s new powers
  • Completing their planning to finalise:
  • new resource needs
  • any necessary additional policy disclosure statements
  • liability exposure mitigation including insurance coverage 


The IA and the Hong Kong insurance industry have much work to do. These regulatory reforms are being implemented at the same time as work continues on risk based capital, the policyholder protection fund initiative and the continued implementation of other international insurance standards of the International Association of Insurance Supervisors.

Important Disclaimer

The information and opinions contained in this publication are for general information purposes, are not intended to constitute legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances.