Articles

Enhancing Policyholder’s Protection with Tighter Regulations on Insurers

Enhancing Policyholder’s Protection with Tighter Regulations on Insurers

Enhancing Policyholder’s Protection with Tighter Regulations on Insurers

Tuesday, 29 November 2016 12:52

By Greg Crichton and Adelina Wong, Consultant

The establishment of an independent insurance authority (IIA) in Hong Kong has been six years in the making, starting with a public consultation in July 2010. This culminated in the enactment of the Insurance Companies (Amendment) Ordinance 2015. The policy objective of the reform, including the establishment of the IIA (which is expected to take over the regulation of authorized insurers early next year), is to promote public confidence in the insurance industry and enhance customer protection by, among other things, improving the corporate governance and financial soundness of insurers in Hong Kong.
Authorized Insurers (of which there are currently 161 in Hong Kong) have new corporate governance guidance standards to meet by 1 January 2017 (delayed requirements excepted). Overseas authorized insurers with over 50% of their gross premium income derived from Hong Kong insurance business are included in this group (with an exemption if they are already subject to comparable regulation standards). In particular, Guidance Note (“GN”) 10 issued by the Office of the Commissioner of Insurance (“OCI”), the current regulator of the authorized insurers in Hong Kong, sets out the corporate governance standards to be met.


GN10 – Corporate Governance
GN 10 was recently amended by the OCI in October 2016 to enhance the corporate governance requirements for authorized insurers, highlights of which include the following:
-at least one third of the board to be independent non-executive directors;
-the roles of Chairman and Chief Executive to be separated;
-key persons to be appointed for control functions, including actuarial, financial control, internal audit, compliance, risk management and intermediary management;
-Board to establish an Audit Committee and a Risk Committee and where appropriate, Investment, Nomination, Remuneration, Underwriting, Claims Settlement and Reinsurance Committees should also be established; and
-New requirements regarding remuneration policies and practices covering all directors and employees at authorized insurers, with specific regard to directors, senior management, key persons in control functions and material risk-taking employees.


GN16 – Customer Protection
In the customer protection area, the OCI has also issued new guidance, GN 16 on underwriting long-term business (other than investment-linked Class C business covered by the earlier GN15) on July 30 2015 to impose new requirements aimed at the “fair treatment of customers” throughout the product life cycle. GN16 has been effective as of 1 April 2016 for new long-term products, and will be effective as of 1 January 2017 for new and existing policies for current long-term products. GN 16 imposes new and stringent requirements regarding product design, communications, sales and post-sale arrangements for all of these products. It also has ramifications for the remuneration of insurance intermediaries in that indemnity commission, or any standing arrangement that offers advance payment of commission, is now strictly prohibited.
To give real teeth to GN16, the guidance provides that any attempt by Controllers and/or Appointed Actuaries to circumvent the requirements prescribed in GN16 would be regarded as acting in bad faith, such as may
impact their “fit and proper” assessment and render them unacceptable to the OCI and the IIA (when it takes over from the OCI in 2017).
Generally speaking, it is expected that the IIA, which is charged with the duty to promote proper standards of conduct by authorized insurers and licensed intermediaries in Hong Kong, will enforce existing non-statutory codes and guidelines (including under guidance notes in the appropriate case) in furtherance of this duty, using its expanded investigative and disciplinary powers under the Insurance Companies (Amendment) Ordinance. Notably, the IIA has the power under the Ordinance to take disciplinary action against authorized insurers and insurance intermediaries for breach of conduct requirements. In addition to the imposition of fines, the IIA may suspend or revoke an insurer’s authorization to carry on business or an intermediary’s license


The OLN Insight
The introduction of an independent regulator will no doubt lead to more codes of conduct being put in place which will be enforced through a more robust inspection and investigation regime. Further reforms are on the horizon. For example, the Hong Kong government has clearly signalled its intention to implement a risk-based capital framework for insurers and introduce a policyholders’ protection fund in the next few years. These changes bring Hong Kong in line with international supervisory standards and regulatory trends, and should help to promote public confidence in and the stable growth of the Hong Kong insurance industry, as intended by the government.
However, Hong Kong’s insurance industry will face significant challenges in adjusting to the new regulatory landscape. The cost of compliance will be high and it will be difficult in many cases for Hong Kong insurers to meet the stringent new conduct and governance requirements, including notably the enhanced requirements for independent non-executive directors under GN10. Similarly, new conduct requirements for insurers (including those relating to the “fair treatment of customers” GN16) and insurance intermediaries may lead to a change of distribution strategy and/or drive some of the smaller industry participants to consolidate.