Reported by news outlets during April earlier this year, the China Insurance Regulatory Commission ("CIRC") issued a public statement ("Statement") regarding the purchase of Hong Kong insurance policies by Mainland customers. The CIRC warned Mainland purchasers of the legal, financial and policy risks of buying Hong Kong insurance products. What does this mean for Hong Kong's insurance regulators and insurance companies?
According to Hong Kong's insurance watchdog, the Office of the Commissioner of Insurance ("OCI") (its function will be taken up by the Independent Insurance Authority ("IIA") in phases later this year), spending on insurance policies by Mainland policyholders surged from HK$4.4 billion in 2010 to HK$31.6 billion last year. The surge accounted for 24.2% of the total new premiums in respect of all life policies sold in Hong Kong in 2015.
It was reported around the time of the Statement's release in April that China Life (the Mainland's largest life insurer) had issued a profits warning that its first half year result could drop 55-60% compared to the same period in 2015. Meanwhile, Hong Kong's largest insurer, AIA, reported new business in its financial first quarter of 2016 was worth US$578 million, up 36% from last year.
It has been reported that the reasons for the increased appetite for Hong Kong insurance products by Mainland customers appear to be two-fold: moving money abroad in light of a slowdown in the Chinese economy and offsetting the further weakening of the Chinese yuan by purchasing US-dollar and Hong Kong-dollar policies.
The purpose of the CIRC's Statement in April was to raise awareness of the risk of purchasing Hong Kong policies for the protection of Mainland buyers. The Statement addresses 3 issues:
Mainland residents must travel to Hong Kong to purchase Hong Kong life insurance policies and sign the relevant policies in person. Purchasing a Hong Kong policy on the Mainland is illegal, and people who do so will not be able to enforce the policy either on the Mainland or in Hong Kong.
Purchasers from the Mainland must also be aware that policies drawn up in Hong Kong are drafted in traditional Chinese and English. It is advisable that customers fully understand the meaning and effect of the content of the life insurance policies which they are purchasing and contracting into. Furthermore, it is highly likely that a Hong Kong life insurance policy will be subject to the laws of Hong Kong and that the Hong Kong courts will have jurisdiction to adjudicate in respect of any dispute arising from the policy.
The CIRC warned policyholders that legal costs in Hong Kong are higher than those on the Mainland and resolving disputes arising from Hong Kong policies will be more expensive. Even though Mainland policyholders could turn to the Insurance Claims Complaints Bureau ("ICCB") to resolve disputes arising out of their Hong Kong life insurance policies, the ICCB can only handle claims not exceeding HK$1,000,000. Otherwise, disputes exceeding HK$1,000,000 must be dealt with through expensive legal proceedings.
The CIRC's Statement points out that the purchase of Hong Kong life insurance policies falls under the definition of a transaction under a capital account, something which has not yet been liberalised by the Mainland under its current foreign exchange control policy. Mainland customers must also bear in mind that because they are purchasing US-dollar and Hong Kong-dollar life insurance policies, all compensation and claims will be settled in those currencies.
The CIRC warns that for with-profit life insurance policies in Hong Kong: (1) there are no clear requirements of guaranteed bonus rates, as required on the Mainland. Although most products in Hong Kong cite an investment yield of more than 6% as a bonus rate, this is not guaranteed and; (2) there are no specific requirements set on the cash value of insurance policies, unlike on the Mainland, and that consequently, Mainland customers need to be made aware that surrendering policies early on may result in a low valuation of the cash value of the policies.
Responses to the Statement from various sectors in Hong Kong's insurance industry range from support for the Mainland regulator being proactive by alerting potential customers of the risks involved in purchasing Hong Kong policies, to dismay that the watchdog appears to be intervening in Hong Kong's free-market competition in the insurance marketplace.
The OCI initially did not comment specifically on the CIRC's Statement, but cautiously continued to welcome the purchase of insurance products in Hong Kong by Mainland customers, whilst warning those selling insurance in Hong Kong not to mislead policyholders. In a subsequent statement, the OCI supported the CIRC's initiative and said that there must be enhanced protection for Mainland purchasers who may not understand the potential risks of owning Hong Kong life insurance policies.
An insurance company selling personal and life insurance products to Mainland purchasers will need to keep up to date on any new regulations the OCI may implement. One potential requirement already being discussed is obtaining a signed acknowledgement from Mainland purchasers stating that they understand the key elements of the policy being purchased. Furthermore, insurance companies must continue to be mindful and vigilant in performing "Know Your Client" procedures, so as to remain compliant with Hong Kong's anti-money laundering regulations.
All of these issues must be considered against the backdrop of the OCI's inevitable handover of responsibility to the new IIA later this year, which will be empowered to issue licenses and regulate the selling of insurance products in Hong Kong, and will have enforcement powers to prosecute and discipline vendors of insurance for misselling and non-compliance.