Asia Pacific - focus on insurance

Publication | July 2011


Welcome to our quarterly bulletin on insurance issues in the Asia Pacific region. In this bulletin we will cover recent legal developments that may be of interest to insurers and reinsurers operating in the region.


Dai-ichi Life completes acquisition of TOWER Australia

On 11 May 2011, the Dai-ichi Life Insurance Company Limited (Dai-ichi Life) completed its acquisition of TOWER Australia Group Limited (TOWER Australia).


TOWER Australia is the holding company of TOWER Australia Limited, one of Australia’s largest life insurers. TOWER was founded in New Zealand in 1869 and commenced operations in Australia in 1990. Since then TOWER has grown significantly through natural growth and acquisitions. In 2006 TOWER Australia demerged from TOWER Limited, which has continued to do business in New Zealand.

As at 30 September 2010, TOWER Australia Limited had a market share of around 11 per cent of the Australian life insurance market. As at 31 December 2010, it had approximately AUD1.2 billion of in-force premiums and was Australia’s third largest life insurer.

Dai-ichi Life was founded in Japan in 1902 and is one of the world’s top ten life insurers by revenue. In 2010, following its demutualisation, Dai-ichi Life was listed on the Tokyo Stock Exchange. The company issued 10,000,000 ordinary shares and at that time had stated capital stock of 210.2 billion yen. As at 31 December 2010, the company’s market capitalisation was 1.32 trillion yen and it had a market share of around 10.5 per cent of the Japanese life insurance market.

In recent years Dai-ichi Life has pursued a strategy of diversifying its business by increasing the proportion of income generated from overseas entities across the Asia Pacific region. This diversification has included the following acquisitions and investments:

  • in Vietnam, the acquisition of Dai-ichi Life Insurance Company of Vietnam Limited (formerly Bao Minh CMG) in January 2007;
  • in Thailand, a strategic business alliance with Ocean Life Insurance; including the acquisition of its shares in July 2008;
  • in India, a joint venture, Star Union Dai-ichi Life Insurance Company Limited, with two major Indian banks, which commenced operations in February 2009;
  • in Taiwan, an equity investment in Shin Kong FH (Shin Kong Life); and
  • in Australia, the progressive acquisition of TOWER Australia. This commenced with an initial investment of 29.7 per cent in October 2008.
Scheme of Arrangement

As at 29 December 2010, Dai-ichi Life owned 29.0 per cent of TOWER Australia.

On that date TOWER Australia announced that Dai-ichi Life had offered to acquire all of the issued shares in TOWER Australia that it did not already own for AUD4.00 cash per share, with the transaction to be implemented by way of a Scheme of Arrangement. The cash consideration of AUD4.00 per share represented a premium of 46.5 per cent on the Australian Securities Exchange (ASX) closing price of TOWER Australia shares on 24 December 2010, the last day of trading before Dai-ichi Life’s offer was announced. The offer valued TOWER Australia at AUD1.76 billion.

The independent directors of TOWER Australia unanimously recommended that TOWER Australia’s non Dai-ichi Life shareholders should vote in favour of the Scheme of Arrangement, in the absence of a superior proposal and subject to confirmation by an independent expert that the Scheme of Arrangement was fair and in the best interests of non Dai-ichi Life shareholders.

At a meeting of TOWER Australia shareholders on 18 April 2011, more than 97 per cent of non Dai-ichi Life shareholders and 99.78 per cent of total shareholders voted in favour of the Scheme of Arrangement. Trading in TOWER Australia shares on the ASX ceased at the end of 17 April 2011.

On 21 April 2011 the Federal Court of Australia approved the Scheme of Arrangement.

The Scheme of Arrangement became effective on 27 April 2011 and was implemented on 11 May 2011.

Regulatory approvals

The Scheme of Arrangement also required approvals from the following Australian and Japanese regulatory bodies:

  • the Australian Foreign Investment Review Board, under the Foreign Acquisitions and Takeovers Act 1975 (Cth);
  • the Australian Prudential Regulation Authority, under the Financial Sector (Shareholdings) Act 1998 (Cth); and
  • the Financial Services Agency of Japan.
Further acquisitions?

Dai-ichi Life has indicated that it is interested in further acquisitions. This is consistent with:

  • Japan’s declining birth rates and aging population – which limits the possibilities for growth in Japan; and
  • the comparatively superior investment returns that can be achieved outside of Japan. Investment returns in Japan are comparatively low, with the consequence that a non-Japanese target does not have to be generating returns anywhere near what a US, European or Australian investor might require in order for the target to be attractive to a Japanese investor. This means that Japanese investors may be prepared to out-bid investors from those other countries.

For further information, please contact Scott Charaneka or Stanley Drummond in Sydney.

Case notes

The following case summaries have been written by Professor Rob Merkin who is a consultant to the insurance and reinsurance and international arbitration teams.

Moore v National Mutual Life Association of Australasia Ltd [2011] NSWSC 416

The insurers under an income protection policy sought to avoid the policy for fraudulent misrepresentation and non-disclosure, and also to recover Aus$495,051.00 paid under the policy in respect of disability benefits. Ball J held as follows:

  1. The assured had been guilty of misrepresenting facts about his occupation, his income and also his mental health and use of drugs. Those representations were made fraudulently. The insurers would not have issued the policy on the terms that they did if they had known the true facts. Accordingly the insurers had a right to avoid.
  2. The insurers had elected to affirm the policy by issuing monthly claim forms to the assured and requiring him to undergo medical examination, but when they did so they were not aware of the facts that gave them the right to avoid so they had not lost the right to avoid by reason of waiver.
  3. The insurers were not estopped from avoiding the policy. The assured was unable to point to any representation by the insurers that they would not avoid. Merely paying claims in the absence of knowledge of any right to avoid could not amount to a representation that there would be no avoidance if the true facts were known.
  4. The assured had to repay the benefits received by him under the policy. Sums paid under a contract avoided for misrepresentation were in principle recoverable subject to the defence of change of position, i.e. detrimental reliance on the faith of the receipt which made restitution inequitable.

Foregoing an opportunity could amount to a change of position, as where an assured who received payment under a policy chose not to make an alternative claim for social security or other benefits. In the present case the benefits received by the assured changed his position by foregoing the opportunity to receive other benefits and to seek alternative employment, and he also incurred living expenses that he would not otherwise have incurred but for the receipt of the insurance money. While living expenses were generally to be disregarded in determining whether there was a change of position, that was not the case where the payments were made to cover living expenses and the assured would have taken other steps but for those payments.

QBE Insurance (Australia) Ltd v Cape York Airlines Pty Ltd [2011] QCA 60

This was a factual issue as to whether the insurers of a Cessna 208 aircraft which ditched into the sea and was later recovered had elected to repair the aircraft instead of paying for a loss. The relevant clause provided that the insurer would “at its option pay for, repair, or pay for the repair of, accidental loss of or damage to the Aircraft described in the Schedule ...” The court’s starting point was that an election was valid only if it was communicated to the other party in clear, unequivocal and unconditional terms. Applying those principles, the court ruled that there had not been any election. The insurers had instructed the assured to accept the quotation provided by a repairer and to proceed with the repairs, but the insurers had no right to require the assured to enter into a contract with a third party for repairs. The election was thus conditional on the assured entering into such a contract, but the condition was not one that the insurers could impose. Accordingly, there was no unequivocal election.

Zurich Australian Insurance v GIO General [2011] NSWCA 47

Mr McLellan, who was employed by Caringbah as a coach driver, injured his shoulder when he was lifting the heavy bottom-hinged door of a trailer towed by the coach. The coach belonged to an associated company, Tiger. Zurich were the motor liability insurers of Caringbah, and conducted its defence in the claim brought by Mr McLellan. Tiger was covered by GIO against liability to pay workers compensation, and payments of A$172,834,48 were made to Mr McLellan. In the negligence proceedings Caringbah admitted that it was in breach of a duty of care owed to Mr McLellan, and there was no dispute that the breach of duty caused the injury. Damages were, with the concurrence of GIO, agreed at A$352,000, inclusive of workers compensation payments, plus costs of A$77,360, a total of A$429,360. Zurich paid A$256,525.52 to Mr McLellan.

In the present proceedings GIO claimed that the full sum should be shared equally between Zurich and GIO, and accordingly that Zurich owed GIO A$41,845.52. The NSWCA held that there was double insurance, in that both Zurich and GIO were independently liable for the full amount of the loss. It was irrelevant that there were different assureds covered by different types of policy. What mattered was that there were two or more insurers on risk for the same loss. The court applied its own decision in AMP Workers Compensation Services (NSW) Ltd v QBE Insurance Ltd [2001] NSWCA 267 and also Workcover Queensland v Suncorp Metway Insurance Ltd [2005] QCA 155. The court also confirmed that:

  1. the time for assessing whether there is a contribution claim is the date of the loss (see QBE Insurance (Australia) Ltd v Lumley General Insurance Ltd [2009] VSCA 124);
  2. there is double insurance for liability claims even if the victim has chosen to sue one particular defendant but not another, if they would both have been liable and covered by their liability policies (see Mercantile Mutual Insurance (Aust) Ltd v QBE Workers Compensation (NSW) Ltd [2004] NSWCA 409); and
  3. if one insurer pays beyond its legal liabilities, for example, because of a rateable proportion clause, it is not precluded from recovering contribution from the other if there is a protest against payment so that it cannot be said that payment is voluntary (see GRE Insurance Ltd v QBE Insurance Ltd (1985) VR 83).


CIRC encourages applications for the establishment of insurance asset management arms

On 7 April 2011, the China Insurance Regulatory Commission (CIRC) issued the Circular to Adjust the Interim Administrative Measures on Asset Management Companies of Insurance Companies (the Circular). Late last year, the CIRC publicly announced its intention to encourage medium to small-sized insurance companies to set up their own asset management companies (AMCs). Before which the CIRC had not approved the establishment of AMCs by insurance companies for almost four years.

The Circular is a signal that the CIRC wishes to receive new applications for the establishment of insurance AMCs. However, it should be noted that the thresholds are now stricter for major sponsors (including insurance holding companies and insurance subsidiaries) when compared to those for general shareholders.  

Whilst the Circular reduces the required term of the insurance business for major sponsors from eight to five years, it increases the total asset requirement from RMB5 billion to RMB10 billion, for major sponsors who are insurance subsidiaries, and from RMB10 billion to RMB15 billion, for major sponsors who are insurance holding companies. It also introduces a new threshold for the solvency ratio of a major sponsor, which should be no less than 150 per cent. Additionally, the CIRC has increased the minimum paid-in capital for insurance AMCs from RMB30 million to RMB100 million.

Moreover, the CIRC has broadened the range of funds that can be managed by insurance AMCs. In the past, an insurance AMC was only allowed to manage the funds entrusted to it by its shareholders or owned by the insurance AMC itself. Now, the CIRC will allow an insurance AMC to manage funds entrusted by any other party and will permit it to launch insurance wealth management products.

The change highlights the CIRC’s determination to widen the investment functions of insurance AMCs. It represents an important step towards the provision of asset management services to the public (especially wealthy individuals who wish to buy insurance wealth management products) by insurance AMCs and should allow them to turn themselves into comprehensive asset management companies.

In light of these major changes, it is anticipated that insurance AMCs are likely to become yet another popular investment mechanism.

For further information, please contact Ai Tong in Shanghai.

CIRC proposes to allow non-bank financial institutions to sell insurance products

The CIRC issued draft rules for public comment on 7 April 2011. The main purpose of the rules is to allow non-bank financial institutions to sell insurance products (the Draft Rules). By way of background, the CIRC and the China Banking Regulatory Commission (CBRC) tightened up the bancassurance regulations last year. Consequently, the sales of bancassurance experienced a considerable slow down. Should the Draft Rules come into force, many expect the CIRC to make more distribution options available to insurers.

According to the Draft Rules, non-bank financial institutions (including securities firms, trust companies and financial leasing companies) that wish to sell insurance products will have to apply to the CIRC for the sideline insurance agency qualification. In addition, a representative salesperson must be selected to become a qualified insurance agent.

It should be noted that, under the Draft Rules, insurers are not only responsible for authorised insurance agency activities conducted by qualified non-bank financial institutions, but also non-bank financial institutions without authorisation or whose permits have expired (as long as the purchaser of the insurance product is a bona fide party). With this in mind, insurers are advised to carefully select their cooperative partners and to enter into comprehensive agreements, so as to avoid any unnecessary disputes in the future.

The Draft Rules contain a number of other restrictions. For example, qualified non-bank financial institutions are only permitted to sell insurance products within specific areas of their premises. As with bancassurance products, the Draft Rules provide that insurance products sold via non-bank financial institutions cannot be linked to any bank deposit products, funds or other wealth management products. Furthermore, except for commission fees agreed in advance, qualified non-bank financial institutions or their representatives may not ask for additional remuneration from insurers as reward for selling their products.

One feature of the Draft Rules which contrasts with restrictions in relation to bancassurance is that there is no maximum limitation on the number of partners that an insurer is permitted to cooperate with. Should the Draft Rules be implemented, it is expected that insurers and non-bank financial institutions will be able to gain significantly through cooperation.

For further information, please contact Ai Tong in Shanghai.

CIRC’s new draft amendments to the Administrative Measures for Foreign Insurance Institutions’ Representative Offices

On 31 March 2011, the CIRC issued the Administrative Measures for Foreign Insurance Institutions’ Representative Offices (the Draft Amendments) for public comment. This is the third amendment since the CIRC first promulgated the Administrative Measures for Foreign Insurance Institutions’ Representative Offices in 1999, the two other amendments having been released in 2004 and 2006 (collectively, the Measures).

Under the Draft Amendments, qualified foreign insurance entities are defined to include insurance group companies, insurance companies, insurance intermediaries, insurance associations, and other insurance organisations. It is the first time that foreign reinsurance companies have been removed from the list, and the reason for this is currently unknown.

In contrast to the Measures, the Draft Amendments introduce new thresholds and criteria for foreign insurance intermediaries setting up representative offices in China. For example, the applicant foreign insurance intermediary must have been established for more than twenty years and must not have been subject to any serious penalties in the last three years. In addition, it should have total assets worth no less than USD200 million in the last financial year.

The Draft Amendments also impose additional qualification requirements for general and chief executives. Under the Draft Amendments, individuals performing these functions are required to have a bachelor degree and should not have been subject to any serious penalty within the last three years. Finally, the Draft Amendments further refine the sanction provisions against representative offices that illegally engage in insurance business.

For further information, please contact Ai Tong in Shanghai.

CIRC lowers barriers for insurers to issue subordinated bonds

On 18 May 2011, the CIRC issued the revised draft of the Administrative Measures of Issuance of Subordinated Bonds by Insurance Companies (the Revised Draft) for further public comment. The CIRC published the initial draft last December, aiming to tighten up the requirements for insurers to issue subordinated bonds. Following the initial draft, the CIRC noted that insurance companies were experiencing difficulties in locating alternative financing channels. This was having a detrimental effect on the solvency of some insurers. Consequently, the CIRC has lowered the barriers in the Revised Draft to ease refinancing pressures for insurance companies in the secondary market.

Under the Revised Draft, qualified fundraisers including domestic insurers, insurance joint ventures, and wholly foreign owned insurers may issue subordinated bonds. The issuance of subordinated bonds by insurance group or holding companies is expressly prohibited. As with the initial draft, the Revised Draft stipulates a minimum three year business operation requirement for qualified fundraisers to issue subordinated bonds. The initial draft required fundraisers to have a one year projected solvency of lower than 100 per cent. By contrast, the Revised Draft permits a lower solvency requirement under which the fundraisers need to demonstrate that their solvency or two year projected solvency is lower than 150 per cent.

The Revised Draft states that fundraisers need to show that they had at least RMB500 million of net assets at the end of the most recent year as opposed to RMB1 billion, as stated in the initial draft.   

It is believed that the enforcement of the Revised Draft may, in the short term, ease financing pressure on insurers. However, insurers still have to focus on product restructuring and diversified distribution to solve the issue of long-term solvency.

For further information, please contact Ai Tong in Shanghai.

CIRC drafts rules on the transfer of insurance business in China

On 22 March 2011, the CIRC issued its draft Interim Administrative Measures on Transfer of Insurance Business by Insurance Companies (the Measures) for public consultation. The Measures indicate that a legal framework will soon be in place to facilitate and regulate entire or part transfers of insurance business between insurance companies in China. The consultation closed on 11 April 2011.

Under current Chinese law, an insurance business portfolio transfer may only arise where a reinsurance arrangement is made or a life insurance company becomes insolvent. The lack of a legal framework for transfers of insurance business has become an obstacle for the restructuring and acquisition of insurers over recent years. The Measures are a response to the recent increased demand for mergers and acquisitions of insurance businesses amongst both domestic and foreign insurers in the Chinese market.

The Measures have 21 articles in total. They purport to protect the interests of both policyholders and assureds. They also set out clear regulatory procedures for insurance companies to comply with when undertaking portfolio transfers.

The Measures state that any proposed transfer of insurance business should be approved by the CIRC. Upon obtaining approval, the transferor should notify policyholders and assureds, requesting their consent. The notification should provide basic information about the transfer proposal and the transferee. Where an assured under a life insurance policy has died, the transferor should notify and obtain consent to the transfer from the beneficiary of the policy concerned. It is unclear what would happen if assureds do not give their consent to the transfer of the policies.

The Measures also require the insurance companies involved in the transfer to make a joint public announcement in the media and on their own respective websites.

The Measures state that the insurance companies involved in the transfer should appoint both professional accountancy firms and law firms to advise on the value of the business to be transferred and on whether the transaction is compliant with applicable laws.

The Measures explain that after the transfer, the transferee assumes all obligations which were owed to the policyholder, the assured and the beneficiary by the transferor as if it were a party to the original insurance policy.

In the event of a transfer of the whole business of an insurance company, within fifteen working days of completion of the transfer agreement, the transferor must apply to the CIRC for cancellation of its insurance permit and to the relevant office of the State Administration for Industry and Commerce for deregistration of its business licence.

The Measures have a number of weaknesses which will need further consideration. Nonetheless, once formally adopted, they will provide a basic legal framework for insurance companies to structure the transfer of insurance business, and achieve their plans for the restructuring and acquisition of insurance business in the Chinese market.

For further information, please contact Wenhao Han in Hong Kong.

CIRC tightens up the supervision of internet insurance business

Online sales of insurance policies are now a popular method of distribution welcomed by younger consumers in Chinese insurance markets. Closely monitoring this recent development, the CIRC issued its draft Regulations on the Supervision of Internet Insurance Business (the Regulations) for consultation earlier this year. The consultation closed on 3 May 2011.

Under the Regulations, conducting internet insurance business is defined to include insurance companies or insurance intermediaries (i.e. insurance brokers and professional agents) selling insurance products or providing insurance-related intermediary services through their own websites or websites of third party service providers. Notably, the Regulations expressly prohibit insurance sideline agents from carrying out internet insurance business.

In order to conduct online business, insurance companies and intermediaries must obtain the requisite Internet Content Provider (ICP) license and certificates for their business, or register their websites with the relevant government agencies for the administration of internet operation and services. The Network Access Server (NAS) must be located in the People’s Republic of China, excluding Hong Kong, Macau and Taiwan.

Insurance intermediaries providing services through the internet must have a registered capital of no less than RMB 10 million (approximately USD 1.53 million). Where websites are owned by third party service providers, such providers must also have net assets of no less than RMB10 million at the end of its previous financial year and must have no record of malpractice for the last three consecutive years.

The Regulations provide that within ten working days of the website commencing its operation, the companies must file relevant documentation with the CIRC, setting out the specifications of their websites, a list of the personnel in charge, and the procedures for insurance underwriting, premium collection and claims processing. In some circumstances the CIRC may require additional information.

The Regulations require insurance companies and intermediaries, conducting online business, to use their websites to clearly set out key information pertinent to their products, including:

  • The special features of the product.
  • The entire set of clauses and schedule of premium, which shall be sufficiently clear to draw the proposer’s attention to the cooling-off period, exclusions, deductibles, termination provisions and the cash value of the policy.
  • Method of payment of premium.
  • Documentation of the insurance policy.
  • Method of delivery of the insurance policy.
  • Contact details for the proposer to make queries or complaints.
  • The procedure for underwriting, claim and payment of insurance proceeds.
  •  Security measures which protect the proposer’s privacy and the security of the transaction.

At the request of the proposer, a hard copy of the insurance policy shall be delivered to the insured within five working days of the conclusion of the contract. Insurance companies and intermediaries, conducting business through the internet, shall keep proper records of the relevant transactions for no less than five years, if the insurance period is shorter than one year, or for no less than 10 years if the insurance period is otherwise longer than a year.

Breach of the Regulations may attract administrative fines for both the companies and/or the relevant personnel concerned. Depending on the seriousness of the breach, the personnel directly in charge or responsible for the breach will be given warnings or even removed from their position or disqualified.

For further information, please contact Wenhao Han in Hong Kong.

Administrative Measures on the Management of Deposits for Capital Recognizance by Insurance Companies to be amended by the CIRC

On 18 May 2011, the CIRC issued its draft Administrative Measures on the Management of Deposits for Capital Recognizance by Insurance Companies (the Measures) for public consultation. Consultation closed on 25 May 2011. Once adopted, the Measures will replace the current CIRC interim Administrative Measures on the Management of Deposits for Capital Recognizance by Insurance Companies (the Interim Measures) which were issued on 2 August 2007.

Under the Insurance Law of the People’s Republic of China 2009, insurance companies are required to deposit 20 per cent of their registered total capital into designated bank accounts for capital recognizance, which can only be used to pay their debts in the event of insolvency.

The Measures now remove the limit on the number of banks with which an insurance company can place its deposits. The fund must be deposited with more than two Chinese national commercial banks. Furthermore, the threshold capital requirement of the banks has been increased. The registered capital of the bank must not be less than RMB 20 billion. In the past, the Interim Measures allowed insurance companies to select 1-3 Chinese commercial banks with a registered capital of no less than RMB 4 billion to hold their deposits.

The Measures also require the banks chosen to hold the capital deposits to be designated banks located in the same city as the registered business address of the insurance company or in provincial capital cities or autonomous municipal cities.

The Measures retained the requirements in the Interim Measures which state that the deposit period must not be less than one year, and that without prior approval of the CIRC, no amendment shall be made to the deposit agreement by the parties. Once a deposit is made, a copy of the deposit agreement must be filed with the CIRC for approval within ten working days of the date of deposit. The CIRC is obliged to inform insurance companies of their decision as to whether the deposit is approved or disapproved. Deposit agreements which have not been filed with the CIRC or which have been disapproved are invalid.

The Measures make it clear that insurance companies must not change the nature of the fund during the deposit period and that the fund shall not be used for pledge financing. Similarly, the Measures retain the requirement in the Interim Measures that the bank shall endorse the deposit certificate and undertake not to agree to any change to the nature of the deposit unless it has seen CIRC approval of such changes in writing. If the bank fails to do so, as a result of a lack of due diligence, it will be jointly liable for the debts of the insurance company to the extent that any shortage in the fund was caused by the misapplication of the deposit.

The rest of the Measures retain the provisions in the Interim Measures. It is expected that a stricter implementation of the Measures will be enforced in the future to rectify the recent malpractice of insurance companies in the market. It shows the determination of the CIRC to foster a healthy and stable insurance market with good solvency levels in the coming years.

For further information, please contact Wenhao Han in Hong Kong.

Hong Kong

Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Bill of Hong Kong

The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Bill was published in Hong Kong on 29 October 2010. The proposed legislation aims to improve the current anti-money laundering regime by bringing it in line with the prevailing standards adopted by the Financial Action Task Force (FATF).  One of the key proposals is the codification of customer due diligence and record keeping requirements, which are largely similar to those set out in the guidelines provided by the Hong Kong Monetary Authority (HKMA), Securities and Futures Commission (SFC) and Insurance Authority (IA).

In relation to beneficiaries of an insurance policy, the proposed legislation suggests that, where a beneficiary is identified, the financial institution must record its name. If a beneficiary is designated by description or other means, the financial institution must obtain sufficient information about that beneficiary to satisfy itself that it will be able to establish its identity at the time the beneficiary exercises a right under the insurance policy or at the time of payout.  

The proposed legislation allows financial institutions to conduct simplified customer due diligence in certain transactions involving the following products:

  • a provident, pension, retirement or superannuation scheme that provides retirement benefits to employees, where contributions to the scheme are made by way of deduction from income from employment and the scheme rules do not permit the assignment of a member’s interest under the scheme;
  • an insurance policy for the purposes of a pension scheme that does not contain a surrender clause and cannot be used as a collateral; or
  • a life insurance policy in respect of which an annual premium of no more than HK$8,000 or a single premium of no more than HK$20,000 is payable.

In the event of breach, the relevant authorities (HKMA, SFC, HKMA, Customs and Excise Department) are empowered under the proposed legislation to take disciplinary action against a financial institution that has contravened the specified customer due diligence or record-keeping requirements. A relevant authority can publicly reprimand the financial institution, and order it to take remedial action and to pay a pecuniary penalty not exceeding HK$10,000,000 or three times the amount of profit gained or costs avoided as a result of the contravention.

The Bill was handed to the Legislative Council on 10 November 2010 and is currently tabled for discussion.  Subject to the passage of the Bill, the Government aims to implement the new regime on 1 April 2012.

For further information, please contact Winnie Lee in Hong Kong.

The Policyholders’ Protection Fund

On 25 March 2011 the Financial Services and Treasury Bureau (FSTB) commenced a three-month consultation on the proposed establishment of the Policyholders’ Protection Fund (PPF), aimed at providing a safety net for policyholders in the event of insurer insolvency. This is the second attempt at consultation on the PPF after mixed responses were received during the previous attempt in late 2003 and early 2004. The PPF will better protect policyholders’ interests. Its introduction also aims to maintain market stability in the event of insurer insolvency and to enhance public confidence and the competitiveness of the insurance industry.

The proposal has followed principles which aim to balance the increase in policyholder protection and promotion of market stability, with the need to minimise the additional burden placed on insurers and the risk of “moral hazard”. Ultimately the establishment of the PPF should not in any way compromise the regulatory standards and requirements of the Insurance Companies Ordinance and the Insurance Authority.


The PPF will focus on individual policyholders and, subject to feedback, may extend to small and medium enterprises. Hong Kong already has statutory compensation schemes in place for non-life insurance policies covering motor vehicle third party claims and employees’ work related injuries. Consequently, these will not be covered by the PPF.

The FSTB recommend that all authorised direct life and non-life insurers be mandated by statute to participate in the PPF. However, reinsurers, wholesale retirement schemes and captive insurers, whose clients are generally large corporates will not be involved. Given the vast difference in life and non-life policies, it is recommended by the FSTB that two separate schemes be set up under the PPF, the Life Scheme and the Non-Life Scheme. The Life Scheme will cover all life policies written in Hong Kong and the Non-Life Scheme will cover all direct non-life policies (except those with existing statutory compensation schemes as mentioned above).

All policies which are in force as at the date of the PPF introduction, as well as new policies issued thereafter will be covered by the schemes.

Conditions for activating the PPF

It is proposed that the PPF will be activated in all scenarios where compensation is due to those who are entitled to payment of a claim, but where the insurer is not able to settle the claim. For example, where a winding up order has been made in Hong Kong against the insurer and the insurer is unable to pay its debts.

It has been recommended that there should not be any cut-off date for the submission of claims. Any claims which are submitted either before or after the insolvency of the insurer, but within the time limit specified in the insurance policy, will be considered for payment out of the PPF.

Compensation limits

The PPF should aim to strike a balance between increasing protection for policyholders and minimising the additional burden on the insurance industry. In order to do this the FSTB needs to weigh up the relative cost and benefit of the PPF. It has therefore been recommended that there should be a compensation limit. Presently this stands at 100 per cent for the first HKD100,000 of any claim, plus 80 per cent of the balance, up to a total of HKD1 million, per policy for life policies and per claim for non-life policies.

What happens when an insurer becomes insolvent?
Life Scheme

Owing to the long-term nature of life insurance policies, it is in the policyholder’s best interest if their policy is transferred to another insurer and remains in-force. Consequently, the liquidator will initially seek to transfer the life policies to a replacement insurer. The PPF will be able to facilitate the transfer by making payments of up to HKD$1 million. However, policyholders will be entitled to terminate their policies if they wish and in such circumstances will be able to claim the cash/account value or accumulated benefits up to HKD$1 million.

If the policies cannot be transferred they will be treated as either continuing until expiry or terminated. In the first instance, the PPF Life Scheme should settle any claims arising, subject to the compensation limit. In circumstances where the policies are deemed terminated, the PPF Life Scheme should pay the policyholder the cash/account value of the policy plus declared dividends/bonuses. It may also pay an “ex-gratia” payment (taking into account the losses arising from the premature termination of the policy having regard to relevant circumstances such as the availability of alternative coverage). Again the total payment should not be in excess of HKD$1 million.

Non-Life Scheme

Non-life policies are usually renewable on a yearly basis or for a shorter period. They should generally have expired by the time the insurer is liquidated. Therefore, it is suggested that the Non-Life Scheme will meet all claims arising from these policies up to the compensation limit of HKD$1 million. Whether the incident arose or the claim is submitted before or after insolvency is irrelevant, provided that it is submitted within the time limit of the policy.

Funding mechanisms

The FSTB recommend a “progressive funding model”, involving an initial moderate levy rate combined with a stepped-up levy rate upon occurrence of insolvency. This will ensure that there are funds available from the initial stages of the PPF, whilst the small levy is unlikely to put an inordinate amount of pressure on insurers and affect their sustainability. The FSTB recommend that the fund maintains its flexibility by being able to increase the levy when needed. Any stepped-up levy shall not be prohibitively burdensome so as to be detrimental to the insurance industry.

Undoubtedly there will not be sufficient reserves in the PPF’s formative years to meet all liabilities. Therefore, it is suggested that there should be an effective mechanism to bridge the liquidity gap, such as borrowing from third party lenders for which the Government may act as guarantor, or from the Government directly.

Target fund

The FSTB have performed extensive actuarial modeling to generate a target figure which will manage policyholders’ expectations whilst minimising cost implications for insurers. It is thought that the initial target fund size of the Life Scheme will be HKD$1.2 billion and the Non-Life Scheme will be HKD$75 million, to be built up in 15 years.

Levy rate

International experience has shown levy contribution from insurers to be favourable. The recommended levy rate for both the Life and Non-Life Scheme is 0.07 per cent of the applicable premium.

Looking forward

The FSTB recommend that the PPF is established by statute and should be administered by a Financial Services appointed governing body. Further, the annual budget of the PPF should be subject to the Financial Secretary’s approval and there should be a high level of prudence in investing the money of the PPF.

It remains to be seen whether this second attempt at consultation will receive positive and supportive feedback particularly from the insurance industry players who were previously concerned about “moral hazard” and the impact of the PPF on premiums.

For further information: Proposed Establishment of a Policyholders' Protection Fund: Consultation Paper

For further information, please contact Marie Kwok in Hong Kong.

Hong Kong’s new Arbitration Ordinance

The Hong Kong Arbitration Ordinance (AO) came into force on 1 June 2011. This new legislation is based largely on the UNCITRAL Model Law on International Commercial Arbitration (the Model Law) and replaces the Arbitration Ordinance. In contrast to the old law, which distinguished between “domestic” and “international” arbitrations, the AO establishes a unitary regime based on the Model Law, which will apply to all arbitrations and not merely to “international commercial arbitration”. This is similar to the approach taken in other jurisdictions such as the United Kingdom and Singapore.

A synopsis of some of the key features of the AO is set out below:

Arbitration agreement

The requirement that an arbitration agreement must be in writing can be satisfied by an electronic communication if the information is accessible for any subsequent reference. 

Opt-in provisions for “domestic” arbitration

The AO allows parties to apply opt-in provisions to any Hong Kong seated arbitration, which under the old law only applied to “domestic” arbitrations. There provisions include the default number of arbitrators and appeals on points of law. Where these opt-in provisions apply, the courts will have wider powers to intervene in the arbitration proceedings than they would have under a Model Law arbitration where recourse to court is relatively limited.  

Interim measures and preliminary orders (in aid of arbitration proceedings)

A Hong Kong seated arbitral tribunal is able to grant interim measures and preliminary orders in respect of any arbitration proceedings commenced (unless the parties have agreed otherwise) both in and outside of Hong Kong (so long as certain elements are satisfied). Under the AO, the test for granting interim measures with respect to non-Hong Kong seated arbitrations is more clearly defined.  Specifically, not only must the arbitration proceedings be capable of giving rise to an award that may be enforceable in Hong Kong, the interim measures sought must be of a type which may be granted by the Hong Kong courts in relation to Hong Kong seated arbitrations.


Under the AO, the default position will be that court proceedings commenced in aid of arbitration proceedings are to be heard in private, subject to the court’s right to order the proceedings to be heard in open court. The new position accords with the general perception that arbitration is a confidential process and is intended to balance the need to protect confidentiality with public interest issues of transparency of process and public accountability of the judicial system. An order made by the Court of First Instance in this respect is not subject to appeal.

Mediation in the process of arbitration proceedings

Under the AO, an arbitrator may act as mediator in the same proceedings of an arbitration seated in Hong Kong, if all parties have consented in writing. In the event that settlement is not reached in the mediation, no objection may be made against the person continuing to act as arbitrator solely on the ground that the person acted as mediator.  

This approach is not often used in Hong Kong due to concerns of impartiality. However, in jurisdictions such as China, this “two hats” approach is more widely used and is thought in many instances to speed up the process and to save time and costs.

Looking forward past 1 June 2011

The AO will not only make Hong Kong’s arbitration law more user-friendly but will also cement Hong Kong’s position as a leading arbitration centre in Asia, making it an attractive place to conduct arbitrations.

For further information, please contact Marie Kwok in Hong Kong.

How did the insurance market perform last year?

The insurance market in Hong Kong appeared to have a good year in 2010. The Office of the Commissioner of Insurance (OCI) has recently published the provisional statistics of the Hong Kong insurance industry for 2010, which shows an 11.6 per cent increase in total gross premiums as compared to 2009.  

General business has grown by 9.8 per cent in gross premiums, totalling HK$31.4 billion and 6.9 per cent in net premiums, totalling HK$21.9 billion. Contributing to that growth is the Accident & Health market, the net premiums of which have increased by 8.3 per cent since 2009.  Other major classes of business including Property Damage (15.9 per cent), Goods in Transit (12.7 per cent), Motor Vehicle (4.3 per cent) and General Liability (Non-Statutory) (6 per cent) also contributed to the premium growth in general business.

Pecuniary Loss business enjoyed a substantial gain in profit last year, from HK$175 million to HK$543 million. It is believed that this significant growth was primarily driven by the buoyant property market for mortgage guarantee business and lower claims for credit business.

The industry has also performed well in terms of new premiums (excluding Retirement Scheme business) for long term business.  Total premiums increased from HK$46.5 billion in 2009 to HK$59 billion in 2010, representing a 26.9 per cent growth, which include a 32.8 per cent increase in new Individual Life & Annuity (Linked) business and a 24.9 per cent increase in Non-Linked Individual Life & Annuity business.

According to the OCI, premiums amounted to HK$4.4 billion in respect of new policies issued to mainland visitors, representing 7.5 per cent of the total new premiums for individual business.  

Long term in-force business has recorded total premium revenue of approximately HK$175.8 billion, increasing from HK$157 billion in 2009 by 11.9 per cent. Contributing to this growth have been the increases in revenue from Non-Linked Individual Life & Annuity business (16.2 per cent) and Individual Life & Annuity (Linked) business (18.3 per cent).  

Reinsurance business also recorded an increase in premium receivables by 21.1 per cent as compared to 2009, totalling HK$1.88 billion.

Let’s hope that the insurance industry will have as good a year in 2011.

For further information, please contact Wynne Mok in Hong Kong.


M&A opportunity in the Philippines?

The Philippines has been ranked as the third smallest in the East Asian region in terms of insurance premiums, better only than Macau and Brunei, according to a report prepared by Swiss Re. The Philippine market for life insurance is worth less than US$2 billion compared to Japan’s US$560 billion. Macau’s life insurance market is worth US$408 million and Brunei’s US$128 million. Yet the Philippines has the fifth largest population in the Asian region after only China, India, Japan and Indonesia. In line with this, the country’s penetration levels are amongst the weakest in the region, when compared to the 17 per cent of Taiwan, the 11 per cent of Hong Kong, the 10.4 per cent of Korea, the nearly 10 per cent of Japan and the 6.8 per cent of Singapore. However, improving economic conditions and the innovative efforts of the Philippine private insurers favours growth for the insurers and the insuring public.

In 2015, the Asean Free Trade Agreement will be implemented. This will allow regional players to enter the market and the Philippine Government fears that the better-capitalised and more sophisticated regional rivals could overwhelm local insurers. Both the Philippines Insurance Commission and the Department of Finance recognise the need for domestic insurers to increase their capital base. Accordingly, new insurance capital rules have been introduced which require insurers to have a minimum paid up capital of PHP125 million (US$2.9 million) by the end of June 2011, this increases the previous requirement of between PHP50 million and PHP100 million, depending on the diversification of the business. If an insurer fails to meet the minimum paid-up capital requirement, it will not be issued a certificate of authority (CA) or licence to operate for another year. The Philippine Star has reported that four insurance companies are struggling to meet this requirement. There are also reports that a non-life insurance company has expressed its intention to cease operations. A source, referring to the insurer stated that “it does not have the ability to raise the required capital nor is it willing to do so”. The company is seeking the help of the Philippine Insurance Commission in locating a white knight.

For further information, please contact Anna Tipping in Singapore.



Anna Tipping

Anna Tipping

Camille Jojo

Camille Jojo

Hong Kong
Lynn Yang

Lynn Yang