Ongoing regulatory requirements for insurers

In addition to the requirements for an insurer to be authorised to carry on insurance (whether general business or long term business and whether as a direct insurer, composite insurer, reinsurer or captive insurer) in or from Hong Kong (as described in our companion guidance note on the “Authorisation of insurers in Hong Kong”) there are a number of continuing regulatory requirements that the insurer will need to satisfy on authorisation and thereafter.

Separation of assets and liabilities

An applicant seeking authorisation to carry on long term business will, on commencing its long term business, have to comply with the requirement regarding the separation of assets and liabilities attributable to its long term business under section 22 of the Insurance Companies Ordinance (the Ordinance)1 and ensure that not less than one-sixth of the required solvency margin is held in its long term business funds2. If the applicant is incorporated outside Hong Kong and would not be able to comply with this requirement on a global basis, the applicant may request the Hong Kong insurance regulator, the Insurance Authority (IA), under section 22A of the Ordinance to authorise the applicant to comply with this requirement only in respect of its long term business carried on in or from Hong Kong.

Audit and actuarial arrangements

Auditor

Within one month of beginning its insurance business, a Hong Kong incorporated insurer must appoint a person qualified under the Professional Accountants Ordinance as auditor of the insurer3. An applicant incorporated outside Hong Kong must appoint a person who is qualified to practise as an auditor in the applicant’s place of incorporation with a qualification which the IA accepts as comparable to that of an auditor appointed by a Hong Kong incorporated applicant. Notice of the appointment, including the name and qualifications of the auditor, must be given to the IA within one month of the appointment being made4. Actuary

An insurer carrying on long term business must also within one month of beginning its insurance business appoint an actuary having the prescribed professional qualifications or who is otherwise acceptable to the IA. The actuary must comply with the standards specified in the Insurance Companies (Actuaries’ Standards) Regulation5 or such other standards as the IA accepts as comparable to those standards in carrying out his duties6. Information must also be given to the IA concerning the arrangements in place to ensure that the appointed actuary has direct access to the board of directors of the insurer and has access to all relevant information to enable him to carry out his duties.

Subsequent appointments

When the appointment of an auditor or actuary ends, the insurer is required to make a fresh appointment as soon as practicable and give notice to the IA of that appointment within one month of it being made.

Maintenance of assets in Hong Kong

An insurer that carries on general business (other than a pure reinsurer or a captive insurer) is required to maintain assets in Hong Kong of an amount determined in accordance with section 25A of the Ordinance. For these purposes, the value of the assets (and any relevant liabilities) shall be determined in accordance with regulations made by the IA7.

In addition to such assets, guarantees or arrangements in lieu of assets that the IA may approve in a particular case, the following assets qualify as assets in Hong Kong (provided that in all cases the assets are not subject to an encumbrance or charge, (other than a floating charge))8:

  • real property, including a leasehold interest therein, located in Hong Kong
  • computer equipment, office machinery, furniture, motor vehicles and other equipment located in Hong Kong
  • money, in any currency or monetary unit, deposited and kept in Hong Kong at an authorised institution, as defined in the Banking Ordinance9
  • bonds or other securities issued in Hong Kong provided that they are transferable and registrable at a register in Hong Kong and, in the case of bonds or other securities which are evidenced by certificates, the certificates for them are for the time being kept in Hong Kong
  • bonds or other securities issued outside Hong Kong, the certificates for which are for the time being kept in Hong Kong and which are transferable by delivery, with or without endorsement
  • negotiable bills of exchange, within the meaning of the Bills of Exchange Ordinance10, or other negotiable instruments which are for the time being kept in Hong Kong
  • shares in respect of a company, wherever incorporated and whether or not it comes within the definition of “company” in section 2(1) of the Ordinance, which shares are:
    • transferable and registrable only at a register in Hong Kong, or
    • in the ordinary course of business, transferred and registered at a register in Hong Kong and the certificates for which (if any) are for the time being kept in Hong Kong
  • debts that may be enforced only by legal proceedings in a Hong Kong court, other than amounts recoverable in respect of claims outstanding under reinsurance contracts ceded
  • an interest in a “unit trust”11 which is realisable in Hong Kong and in respect of which the governing law of the trust is expressly stated to be that of Hong Kong to the exclusion of all others12.

The IA may, at the request of an insurer and provided that the IA is satisfied that it would not be contrary to the interests of policy holders to do so, exempt the insurer from the requirement to maintain assets in Hong Kong, subject to such conditions or limitations in respect of the exemption as the IA considers appropriate. In addition, an insurer is not required to maintain assets in Hong Kong to the extent of any assets which the insurer is required to keep, and does keep, in a place outside Hong Kong in accordance with the laws of that place and those assets would be available in priority to settle policy claims in that place on a winding up of the insurer.13

An insurer may, instead of maintaining assets in Hong Kong, substitute in whole or in part a letter of credit or other commitment from a bank (as defined in the Banking Ordinance) in favour of the IA. The terms and conditions attached to such a letter of credit or other commitment are subject to the approval of the IA.

Accounting and record-keeping requirements

An insurer is required to maintain proper books of accounts, which may be kept in legible form or in non-legible form provided that they can be reproduced in legible form14. The books must exhibit and explain all transactions entered into by the insurer in the course of its business. The books must be preserved for seven years from the end of the financial year to which the last entry in the books relates.

In addition, an insurer is required to submit to the IA accounts, statements and other information as required by the Third Schedule to the Ordinance15, unless the IA agrees to modify or vary those requirements on written request of an insurer. Notice of any such modification or variation will be published in the Gazette. The Third Schedule sets out detailed requirements and provisions relating to the accounts and statements, the directors’ report, the revenue account and profit and loss account, an insurer which is a holding company, an insurer carrying on long term business and information to be furnished following an actuarial investigation, together with the various forms in which the required information is to be presented.

An insurer carrying on long term business is also required to have an investigation of its financial condition carried out by its appointed actuary on an annual basis, unless required more frequently by the IA16. As stated above, the actuary is required to provide the IA with certain information following such investigation and is also required to prepare and submit an abstract of his report to the IA. The insurer is also required to prepare a statement containing specified information in respect of its long term business and submit that statement to the IA.

Annual fee

Each authorised insurer must pay an annual fee to the IA17. The annual fee as at 1 March 2006 is HK$227,300 for an insurer authorised to carry on general business or long term business only; HK$456,600 for a composite insurer; and HK$22,600 for a captive insurer.

Changes in controller

Who is a ‘controller’?

A controller of an insurer is defined in section 9 of the Ordinance and includes:

  • a managing director of the applicant or of any ultimate or intermediate holding company
  • a chief executive (being an employee who, alone or jointly with others, is responsible immediately under the authority of the directors for the whole of the insurance business) of the applicant or of any ultimate or intermediate holding company which is also an insurer
  • any person who alone or jointly with an associate can exercise or control the exercise of 15% or more of the voting power at a general meeting of the applicant or any ultimate or intermediate holding company
  • any person in accordance with whose directions or instructions the directors of the applicant or any ultimate or intermediate holding company are accustomed to act
  • in the case of an applicant incorporated outside Hong Kong:
    • a managing director responsible for the applicant’s insurance business carried on within Hong Kong
    • a chief executive of the Hong Kong business, who is an employee who, alone or jointly with others, is responsible (whether or not immediately under the authority of the directors) for the whole of the applicant’s insurance business carried on within Hong Kong (provided that the employee is not also responsible for the applicant’s insurance business carried on elsewhere and he does not have a subordinate who is responsible for the whole of the applicant’s Hong Kong insurance business).

Certain changes in controllers must be approved in advance by the IA, while others can merely be notified to the IA after the change has occurred.

Change in shareholder controller of a Hong Kong incorporated insurer

A change in shareholder of a Hong Kong incorporated insurer will require the prior approval of the Insurance Authority where the new shareholder (either alone or with any associate or through a nominee) will be entitled to exercise, or control the exercise, of 15% or more of the voting power at any general meeting of the insurer18. There is no equivalent provision under which the prior approval of the IA is required on a change of shareholder of an insurer incorporated outside Hong Kong.

It is necessary for the proposed new shareholder controller to serve on the IA a notice in the specified form stating that he proposes to become a controller of an insurer. The IA has three months in which to object to the proposal (though that period may be extended in certain circumstances) and if the period expires without the IA serving on the proposed controller a preliminary notice stating that the IA is considering objecting to his becoming a controller, the person may become a shareholder controller; usually the IA will respond and, where appropriate, issue a no-objection letter well within the three month period though the exact time will depend upon the IA being satisfied that the proposed controller is fit and proper to be a controller of the insurer.

Unless a person who becomes a shareholder controller did not know that the acts or circumstances by virtue of which he became a controller would have that effect19, a person will commit an offence if he becomes a shareholder controller of a Hong Kong incorporated insurer before a noobjection letter has been issued by the IA or the specified period has expired.

Before the IA will issue a no-objection letter, it will generally be necessary (depending in part on the percentage of shares in the insurer to be acquired) for the insurer to submit a new three-year business plan to the IA outlining the plans that the new shareholder has for the insurer and the new shareholder’s ability to provide financial support to the insurer.

If a person becomes a shareholder controller in breach of these provisions, he will commit an offence and the IA may by written notice impose restrictions on the transfer of and rights attributable to the relevant shares and any unissued shares of the insurer concerned.

Change in managing director or chief executive

A managing director or chief executive of a Hong Kong incorporated insurer may not be appointed unless the insurer has served on the IA a notice in the specified form stating the proposal to appoint a managing director or chief executive20. The proposed managing director or chief executive must also consent to the appointment.

Similarly an insurer incorporated outside Hong Kong may not appoint:

  • a person who would be the managing director of the insurer in respect of so much of its insurance business as is carried on within Hong Kong, or
  • a person employed by the insurer who, alone or jointly with others, is responsible (whether or not under the immediate authority of the directors) for the conduct of the whole of the insurer’s insurance business carried on within Hong Kong, not being a person who (i) is also responsible for the conduct of insurance business of the insurer elsewhere and (ii) has a subordinate responsible for the whole of the insurer’s insurance business carried on within Hong Kong

unless the insurer has served an equivalent notice on the IA.

As with a proposed shareholder controller of a Hong Kong incorporated company, the IA has three months in which to object to the proposal (though that period may be extended in certain circumstances) and again, if that period expires without service of a written preliminary notice by the IA, the proposed appointment may be effected. Usually the IA will respond and, where appropriate, issue a no-objection letter well within that period. The exact time will depend upon the IA being satisfied that the proposed managing director or chief executive is fit and proper to be a controller of the insurer.

A person appointed as managing director or chief executive in breach of these provisions is prohibited from acting as a controller of the insurer concerned21 and will commit an offence if he does so, while the insurer commits an offence if it makes such an appointment.

After the event notification of certain changes

Information

The IA must be notified of any changes in the information given by the insurer in or in connection with its application for authorisation within one month of the date on which the change takes place22. In practice, the IA also applies this requirement to information provided to the IA after authorisation has been granted.

Directors and controllers

Where a director (other than a managing director) of an insurer is appointed or ceases to be a director, that director must deliver forthwith written notice of that fact to the insurer23. The insurer in turn is required to deliver forthwith written notice of that change to the IA24. Notification is effected by both the director and the insurer signing the specified form in duplicate and delivering them to the respective parties. “Forthwith” is in practice accepted by the IA to mean “as soon as practicable” rather than “immediately”, though the latter accords more closely to the statutory language. Any change in a director (including a managing director) of the insurer will also need to be notified to the Registrar of Companies in Hong Kong on the relevant form25.

The IA must also be notified forthwith of any change in the controllers of an insurer again on the specified form. The description of controller is set out above. There are two features which in this context are important to note:

  • A managing director of the insurer and of any ultimate or intermediate holding company is a controller, while the chief executive of the insurer and any ultimate or intermediate holding company which is also an insurer is a controller26. The chief executive of a holding company which is not an insurer is not a controller and therefore a change in that person need not be notified to the IA.
  • In the case of an authorised insurer incorporated outside Hong Kong, the terms “managing director” and “chief executive” include the managing director and chief executive respectively responsible for the insurer’s insurance business carried on within Hong Kong as well as the managing director and chief executive respectively described above. It is important for overseas insurers who have sought and obtained the prior approval of the IA to a change in the ‘local’ managing director or chief executive to ensure that they also notify the IA of any change in the managing director or chief executive of the insurer or the relevant holding company itself.

If the IA considers that such a person appointed as a director or controller (other than one in respect of whose proposed appointment notice should have been given to the IA as described above) is not a fit and proper person to be appointed to that position, he may serve on the insurer a preliminary written notice stating that he is considering serving a notice of objection27. If such a notice of objection is served, the insurer would be expected to procure that the relevant person ceases to be a director or controller of the insurer. However, it is not a requirement that it do so, though clearly if such a person remained as a director or controller of the insurer the IA may consider it necessary to exercise his powers of intervention28.

Auditor and actuary

An insurer is required to give written notice immediately to the IA if it decides to remove or replace its auditor or actuary or its auditor or actuary ceases to be its auditor or actuary for any other reason. In addition, the auditor or actuary himself must give written notice immediately to the IA if he resigns or does not seek reappointment on expiry of a fixed term appointment or has qualified his report or statement (as the case may be)29.

Whenever an appointment of an auditor or actuary comes to an end, the insurer is required to make a fresh appointment as soon as practicable and must within one month of making that appointment serve a written notice of that appointment, including the name and qualifications of the person appointed, on the IA30.