Hong Kong: New insurance regulator

In November 2016, Lloyd’s notified the market that the Insurance Authority (IA) is being established to take over the functions of the current regulator, the Office of the Commissioner for Insurance (OCI).

Additionally, on 5 May, the Hong Kong Government announced the appointment of the IA’s senior executive team. Mr John Leung Chi-yan has been appointed as the CEO of the IA for a one-year term from 26 June 2017. Mr Leung is currently the incumbent Commissioner of Insurance at the OCI. Mr Leung will be supported by Ms Carol Hui Mei-ying as the Executive Director for Long Term Business, Mr Stephen Po Wai-kwong as the Executive Director for Market Conduct, Mr Raymond Tam Wai-man as the Executive Director for Policy, and Mr Simon Lam Sui-kong as the Executive Director for Non-Life business; Mr Lam was most recently Chief Operating Officer of Asia Pacific for Starr International Insurance Asia Limited.

The transition from the OCI to the IA has been occurring in stages, with the Provisional Insurance Authority (PIA) being established in December 2015 to conduct preparatory work including development of guidelines and necessary subsidiary legislation.

Intermediary Regulation

Initially, insurance intermediaries will continue to be regulated by the three local self-regulatory organisations (the Hong Kong Confederation of Insurance Brokers, the Professional Insurance Brokers Association for brokers, and the Insurance Agents Registration Board for agents) but preparations have commenced for the transition to a statutory licensing regime.

In the final stage of transition, the IA is expected to take over the supervision of insurance intermediaries, within two years from 26 June 2017. Local coverholders are again advised to be aware of this change and to make appropriate preparations.

Funding for the IA

The IA is to be self-financed with income streams both from the insurance industry and through the introduction of a policyholder levy. The long-term target is for the IA to be financially independent of the government, with about 70% of its expenditure being met by the policyholder levy and the remaining 30% by the various authorisation and user fees.

Authorisation Fees

With effect from 27 June 2017, the annual authorisation fees to be collected by the IA will consist of two elements; namely, a fixed fee of HKD 300,000 (for captive insurers, HKD 30,000; and for composite insurers, HKD 600,000) and a variable fee of 0.0039% on insurance liabilities (capped at HKD 7 million for general or long-term business or HKD 14 million for composite insurers). To reduce the impact on the insurance industry, the variable fee rate will increase gradually in the initial five years until it reaches the target rate of 0.0039%. Lloyd’s will arrange payment of both annual authorisation fees.

Policyholder Levy

The policyholder levy is to be applied to all business underwritten in Hong Kong, with the exception of marine, aviation and transport (MAT) and reinsurance business. The policyholder levy will apply to all policies written on or after 1 January 2018. The levy will be a 0.1% charge on the premium; however to reduce the impact on policyholders, the levy will start at 0.04% and increase gradually until it reaches the target rate of 0.1% in 2021. Lloyd’s is awaiting regulatory guidance on the mechanism for collecting, reporting and paying the policyholder levy. In addition, Lloyd’s is currently seeking initial views from the market with regard to the method for collection and payment of the levy to the IA via discussions with lead syndicates of coverholders and service companies based in Hong Kong

Risk-Based Capital (RBC)

Lloyd’s is also currently in discussions with the IA over its plans to move towards a risk-based capital regime that is appropriate and tailored for the Hong Kong insurance industry which, once implemented, will significantly overhaul the current Hong Kong Insurance Companies Ordinance (ICO) regulatory capital requirements as set out in chapter 41.