In view of the increasing popularity of outsourcing customer-related and back-office business activities by financial service institutions to other parties as a means of reducing costs and achieving strategic aims, the Hong Kong Insurance Authority (HKIA) recently issued a Guidance Note on Outsourcing (GN14).

The GN14 sets out a number of essential issues that the HKIA expects an authorised insurer to take into account in formulating and monitoring its outsourcing arrangements in order to protect the interests of its existing and potential policy holders. The essential issues relate to outsourcing policy, materiality assessment, risk assessment, the service provider, the outsourcing agreement, information confidentiality, monitoring and control, contingency planning, overseas outsourcing and sub-contracting.

The GN14 also sets out the supervisory approach of the HKIA in monitoring the outsourcing arrangements of an authorised insurer. An authorised insurer is required to notify the HKIA when it is planning to enter into a new material outsourcing agreement or to vary significantly such an existing agreement. In addition, outsourcing arrangements would be subject to on-site inspection and off-site review by the HKIA.

The GN14 will come into force on 1 January 2013. Nonetheless, if an authorised insurer has already outsourced its service to a service provider prior to the commencement of the GN14 and if the expiry of such an outsourcing arrangement extends beyond three months after the commencement date of the GN14, the insurer is required to furnish the HKIA with the relevant information specified in the GN14 within 30 days after the commencement date.

For a copy of the GN14, please see here.