Hong Kong has a new insurance regulator – the independent Insurance Authority (iIA) (which for only for a little longer will be called the Provisional Insurance Authority (the PIA)). On 26 June 2017 the PIA will be renamed ‘Insurance Authority’ and take over the regulation of insurers and two years later also the regulation of intermediaries.

This article sets out which stage we are at now in the reform process, what to expect going forward and what to do to prepare.

At which stage are we in the reform process?

The Insurance Companies (Amendment) Ordinance (the Amendment Ordinance) was enacted on 10 July 2015. It amends the existing legislation (namely the Insurance Companies Ordinance) and will rename it ‘Insurance Ordinance’. The Amendment Ordinance comes into effect on date(s) to be specified by way of commencement notices and is being launched in three stages to allow for a smooth transition from co-regulation by the OCI and the SROs to regulation by the iIA:

Stage 1: preparation

Stage 1 was launched on 7 December 2015 and involved the:

  • Establishment of the PIA to hire staff and lease offices etc.;
  • Appointment of chairman Dr Moses Cheng Mo-chi and seven non-executive directors (NEDs) on 28 December 2015; and
  • Preparation of relevant guidelines for insurers and necessary subsidiary legislation before stage 2 commences.

Stage 2: supervision of insurers

On 26 June 2017, the PIA will be renamed the Insurance Authority. This body will take over the duties of the commissioner of insurance and the OCI as the prudential and conduct reg of insurers, frontline regulation of mandatory provident fund intermediaries and enforcement of the anti-money laundering regime. The OCI will be disbanded on the same day although many of the OCI’s staff will migrate to the iIA.

In anticipation of stage 2, on 5 May 2017 Mr John Leung Chi-yan, the incumbent commissioner of insurance, was appointed as the chief executive officer of the IA from June 26, 2017 to June 25, 2018 and executive director (ED) appointments were made for a term of three years.

Various pieces of subsidiary legislation (rules and regulations) are being passed to also be effective from 26 June 2017 to allow IA to come into operation starting from that day. Most amendments merely relate to updating cross-references. However, increases in fees for insurers are noteworthy:

  • Authorisation fees (both payable on authorisation and thereafter annually) will increase from a fixed rate of:
    • Long-term and general insurers: HK$227,300 → HK$300,000
    • Captives: HK$22,600 → HK$30,000
    • Composite insurers: HK$454,600 → HK$600,000plus a variable fee (increasing from 0.0001% on 26 June 2017 to 0.0039% five years later) on insurance liabilities (capped at HK$7 million annually).

Several new ‘user fees’ have been inserted into the Insurance Companies (Register of Insurers) (Prescribed Fee) Regulations.

During stage 2, the regulation of insurance intermediaries by self-regulatory organisations (SROs) will continue but preparations will be carried out for stage 3. In particular the iIA will prepare, in consultation with the industry and the general public as appropriate, the necessary regulatory tools (e.g. code of conduct, guidelines etc.).

Stage 3: supervision of intermediaries

Stage 3 is expected to take place two years thereafter. It is a major shift – a statutory licensing and regulation regime for insurance intermediaries will replace SROs.

The new regime will be activity-based – individuals who engage in ‘regulated activities’ (be they individual insurance agents, technical representatives of insurance agencies or insurance broker companies, or employees of insurers) will be subject to the same licensing and conduct requirements.

For a three-year transitional period, beginning on the day stage 3 is implemented, intermediaries licensed by SROs will be deemed validly licensed and that disciplinary and appeal cases arising while the SRO regime was in force will be followed up by the iIA applying the rules/codes of conduct that were valid at the time.

I. What to expect?

A sneak preview: Revised Guidance Note 10 (on Corporate Governance of Authorised Insurers)(revised GN10)

Revised GN10 was issued by the OCI in October 2016. Parts thereof have already come into effect. However, those parts relating to ‘key persons in control functions’ will only commence on 26 June 2017 and the requirements on the minimum number of independent non-executive directors (INEDs), establishment of a risk committee and remuneration policies only take effect on 1 January 2018. The overarching theme of revised GN10 is the increased regulation of insurers, increased delegation of responsibilities by senior management, and increased risk management and internal controls.

In particular, there are increased specifications and requirements for boards of directors (including an increase in the number of INEDs to 1/3 from 1/5; a requirement to disclose conflicts of interest, the need to establish board committees); a requirement for ‘key persons in control functions’ (i.e. individuals who are solely or jointly responsible for the performance of one or more of the control functions of the insurer) to be ‘fit and proper persons’; increased emphasis on risk management and internal control systems (including cyber security); remuneration policies and customer service and complaints procedures.

II. What to do?

Stage 2 is imminent and insurers should already have prepared themselves for their new regulator and legislation. In particular, insurers should have reviewed their internal compliance and corporate governance policies against their increased obligations and mandatory corporate governance requirements. This may have involved a review of staffing, clarifying responsibilities and aligning reporting with revised GN10 as well as a review of liability insurance policies. The increased supervisory, investigatory and disciplinary powers that the iIA will have were inspired by tough securities legislation.

Intermediaries should likewise be preparing themselves. As they are currently subject to regulation by SROs, intermediaries may well find the iIA considerably tougher.

Given the complexity and importance of the changes we would be very pleased to assist you in your preparations. Caroline Thomas of Hill Dickinson Hong Kong has been following iIA for several years and is well-positioned to assist.