As the insurance market comes to terms with events of recent months and insurers reassess their plans for 2009, we thought it might be helpful in conjunction with the opening of our new Hong Kong associated office to set out in overview some of the requirements for an insurer to establish itself in Hong Kong, the gateway to Greater China.

Establishment of a Branch

A foreign company may establish a branch in Hong Kong to carry on business. If it does so, it must apply for registration under Part XI of the Companies Ordinance. Certain documentation relating to the incorporation of the company in its home jurisdiction must also be provided, such as the memorandum and articles of association, details of the directors and secretary and the place of business. A Registration Certificate will then be issued, which is an essential prerequisite to being authorised to carry on insurance business in or from Hong Kong.  

Incorporation of a Hong Kong company

Alternatively, a Hong Kong company may be bought “off the shelf” and its name then changed appropriately or a new Hong Kong company may be purpose-incorporated in the required name. The company must have a registered office and at least one director and a Hong Kong-resident secretary.

Business Registration

Any person commencing business in Hong Kong is required to register with the Business Registration Office (a branch of the Inland Revenue Department) within one month of commencing business in Hong Kong.

Authorisation of Insurers Only companies authorised under section 8 of the Insurance Companies Ordinance (ICO), Lloyd’s or an approved association of underwriters may carry on any class of insurance business in or from Hong Kong. A company may apply for authorisation and, if it satisfies the authorisation requirements, may be authorised to carry on all or some of the classes of general business or long term business.

Authorisation requirements

Fit and Proper

The Insurance Authority (IA) must be satisfied that the directors and controllers of the applicant are fit and proper persons to hold such positions. Examples of persons deemed to be a controller include a managing director or a chief executive of the applicant and the applicant’s holding company.

The meaning of “fit and proper” is not defined by the ICO but guidance is provided by the IA. The IA looks for high standards of competence and honesty. In deciding whether a person is fit and proper the IA takes into account:

  • financial status
  • character, reputation, integrity and reliability
  • qualifications or experience
  • ability to perform his functions efficiently, honestly and fairly.

Independent Non-Executive Director

In the case of a Hong Kong company, and an overseas company with more than 75% of its business being generated in Hong Kong, at least one independent non-executive director of the authorised insurer is required.

Capital and Solvency Margin

An applicant for authorisation must have paid up share capital and a solvency margin not less than amounts determined in accordance with certain formulae set out in the ICO.

Reinsurance

The applicant insurer is required to have adequate reinsurance arrangements in force for each class of insurance business it proposes to carry on. In considering the adequacy of reinsurance arrangements, the IA will take into account:

  • the type of treaties
  • the maximum retention of the insurer
  • the security of the reinsurers
  • the spread of risks among participating reinsurers.

Other Criteria

There are other criteria for authorisation and the applicant will need to:

  • staff and manage its Hong Kong office appropriately according to the nature and scale of its operations, and appoint a locally based chief executive as controller
  • maintain proper books, accounts and records in Hong Kong
  • ensure the board of directors has knowledge and experience to guide and oversee the applicant’s activities effectively
  • maintain sufficient resources to finance its operations as set out in its business plan
  • continue to have the financial backing of its parent, which should be capable of maintaining the applicant’s solvency
  • demonstrate the viability of its business plan based on a detailed market feasibility study
  • ensure that it does not have a destabilising effect on the insurance market in Hong Kong
  • ensure any international business that it carries on in or from Hong Kong is not detrimental to Hong Kong as an insurance centre
  • demonstrate that there are no conflicts between the interests of the business and its shareholders
  • ensure that it does not engage in “fronting” operations
  • ensure that its application is not for the purpose of bypassing other regulatory legislation (regulatory arbitrage).

Actuarial Expertise

A long term business (life) applicant would need to satisfy the IA that it has sufficient actuarial expertise, including a qualified staff actuary appointed to advise it. The application should be accompanied by a three-year (or longer) business plan and market feasibility study, together with a report and certificate from a qualified actuary acceptable to the IA affirming the appropriateness of the business plan.

Overseas Regulatory Supervision

Furthermore, if it is decided that the applicant should establish a branch in Hong Kong, it must satisfy the IA that it:

  • is incorporated in a country which has a comprehensive companies and insurance law
  • is an insurer under effective supervision by the authority responsible for the proper conduct of insurance
  • carries on business in its home country
  • is a well established insurer with international expertise and of undoubted financial standing.

Hong Kong Federation of Insurers (HKFI)

Upon authorisation, an insurer will be required to join the HKFI and to comply with the various Codes issued by the HKFI. In particular the HKFI has issued a Code of Conduct for Insurers describing the standards insurers are expected to meet and promoting customer rights, and a Code of Practice for the Administration of Insurance Agents.

Insurance Agents

An insurer may not effect a contract of insurance through an insurance intermediary in Hong Kong or accept any insurance business referred to it by an insurance intermediary in Hong Kong unless the intermediary is its appointed insurance agent or an authorised insurance broker. In order to be appointed as an individual insurance agent, a person must be appointed as such by an insurer under a written agency agreement and registered with the Insurance Agents Registration Board on behalf of the insurer.

Insurance Brokers

Insurance brokers are either authorised directly by the IA or indirectly through membership of the Hong Kong Confederation of Insurance Brokers or the Professional Insurance Brokers Association, the two approved bodies of insurance brokers. An authorised insurance broker is required to satisfy the Minimum Requirements imposed by the IA. It is not permitted for a person to be an appointed insurance agent and an authorised insurance broker at the same time.

Compliance with Guidance Issued by the IA

An authorised insurer will also have to comply with the Guidance Notes issued by the IA, including those on the Prevention of Money Laundering and Terrorist Finance and on Corporate Governance of Authorised Insurers.