Following the global financial downturn in 2008 and 2009, the US government was forced to rescue a number of large insurers, such as AIG. In order to prevent a similar situation, the Hong Kong government subsequently proposed the establishment of the Policyholders' Protection Fund to protect policyholders, minimise moral hazards and enhance market stability. A three-month public consultation was conducted between March and June 2011 (for further details please see "Government consults on new Policyholders' Protection Fund").

On January 30 2012 the Financial Services and Treasury Bureau announced the consultation's conclusions and the final proposals for the fund.

Consultation and conclusions

The government received 33 submissions from individuals and companies. The Financial Services and Treasury Bureau noted the general public and industry support for the establishment of the fund

The key conclusions touch on aspects including the fund's coverage, the appropriate level of compensation and compensation basis, the funding mechanism and governance arrangements.

It is proposed that the fund should cover individual policyholders, building owners' corporations, and particularly small and medium-sized enterprises (SMEs).

There was support for including SMEs in the fund, as they have fewer resources with which to assess the financial position of an insurer and are less able to protect their interests. However, concerns were raised about the issue of defining SMEs. Many insurers were concerned that this would impose an additional burden on them, as they would have to incur administrative costs in verifying an SME's status.

The Financial Services and Treasury Bureau settled on a simple definition: a manufacturing business with fewer than 100 employees in Hong Kong or a non-manufacturing business with fewer than 50 employees in Hong Kong. SMEs will be covered by the fund, as their inclusion would not materially affect the proposed levy - for example, in a life policy, it would remain unchanged).

All authorised direct life and non-life insurers will be required to participate in the fund. Insurers may be exempt if they can demonstrate that they offer equivalent protection to their policyholders in Hong Kong through a similar overseas scheme.

Level of compensation and compensation basis
Compensation for life insurance will be on a per-policy basis (or a per-life basis for group policies); for non-life insurance, it will be on a per-claim basis.

The Financial Services and Treasury Bureau rejected proposals to raise the compensation limit from HK$1 million to HK$3 million - this would increase the levy by 57% for the life scheme and 21% for the non-life scheme, but the number of policies that would be eligible for compensation would rise by less than 1%. It has therefore announced that the limit will remain at HK$1 million.

Life and non-life insurance funds - of HK$1.2 billion and HK$75 million, respectively - will be established. Each of the two funds will provide full compensation for the first HK$100,000, plus 80% of the claim's balance.

Funding mechanism
A progressive funding model will be adopted. It will seek to establish an initial target fund through a moderate levy rate, with a stepped-up rate in the event that an insurer becomes insolvent.

Alleviating concerns among insurers about the magnitude of future increases in levy rates, the Financial Services and Treasury Bureau announced that the levy rate will be prescribed by statute and that an increased levy rate would require the Legislative Council's approval.

In the event of an insurer's insolvency, claims paid by the fund will be subrogated to the fund for recovery from the insolvent insurer's assets. The fund will rank equally with the Employees Compensation Assistance Fund (a fund for compensation for employment-related injury) and all other direct insurance claims not met by the Policyholders' Protection Fund.

The board of the Policyholders' Protection Fund will comprise professionals with experience in insurance, finance, accounting, law and consumer affairs. Appointees to the board will have insurance industry experience, provided that such appointments do not give rise to conflicts of interest.


One of the fund's guiding principles is to maintain a balance between enhancing protection for policyholders, minimising moral hazards and placing additional burdens on the insurance industry. SMEs will need to declare the total number of their employees when procuring or renewing a policy, although changes that alter their SME status during the insured period will not affect their protection. Some insurers are likely to be unhappy with this, as the number of employees may not accurately reflect the size of the company - a position which may impose an additional burden on insurers and create a potential moral hazard.

The Financial Services and Treasury Bureau aims to submit a bill to the Legislative Council during the 2012-2013 legislative session and to establish the fund in 2013 at the earliest.

For further information on this topic please contact Kevin Bowers at Howse Williams Bowers by telephone (+852 2803 3688), fax (+852 2803 3608) or email ([email protected]).