The Financial Services and the Treasury Bureau of Hong Kong has recently completed a public consultation on plans to establish an Independent Insurance Authority (IIA) and intends to introduce an enabling bill into Legislative Council by 2011. The objective is to align Hong Kong’s insurance industry with international practice, with the establishment of financially and operationally independent financial regulators. Insurers and insurance brokers in Hong Kong will be required to comply with enhanced supervision by the IIA.
The current framework
The insurance industry operates under the statutory framework of the Insurance Companies Ordinance (Cap.41) (ICO). The Office of the Commissioner of Insurance (OCI), set up by the Insurance Authority (IA), administers the ICO. The Insurance Agents Registration Board, the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association supervise a self-regulatory framework to regulate insurance intermediaries.
Unlike most international financial centres, Hong Kong’s insurance industry is not regulated by an independent regulator. The current framework is financially and operationally dependent on the Hong Kong government. Employees of IA and OCI are, essentially, public servants.
The proposed reforms
A number of major changes are proposed in the consultation paper. First, the IIA will replace the OCI and take over the regulatory function of overseeing the insurance industry. The IIA will regulate insurance intermediaries previously subject to self-regulation. A Governing Board, an Advisory Committee and a statutory appeals tribunal will be established to assist the governance of the IIA.
Second, the IIA will be given new supervisory and disciplinary powers in regulating insurers and insurance intermediaries. In relation to the sale of insurance products in banks, the Hong Kong Monetary Authority (HKMA) will be allowed to impose requirements in addition to those imposed by the IIA.
Third, the IIA will be funded by various licensing fees, user fees and levies. This funding mechanism will recognise the insurance supervisory principle that the regulator should be financially independent.
The proposed reform will enhance the competitiveness of Hong Kong’s insurance industry, match the public expectation of enhanced protection for policyholders and bring Hong Kong’s insurance industry up to the same level as the latest international standards. In particular, the regulation of insurers will be enhanced by the IIA’s full range of supervisory powers and by the removal of the self-regulatory regime of insurance intermediaries. The new powers will enable the IIA to adopt a more pro-active approach regarding complaints by policyholders and misconduct of individual intermediaries, thereby enhancing policyholders’ interests.
However, insurers and insurance brokers operating in Hong Kong should expect to bear an increased burden of compliance with the IIA’s new requirements. The new funding mechanism may also lead to significantly increased costs pressures on insurers and insurance intermediaries. Insurers and insurance brokers may also be required to deal with duplicated regulatory efforts by the HKMA in relation to its new powers to impose additional requirements with regard to the sale of insurance products in banks.