1 How is the writing of insurance contracts regulated in your jurisdiction?
The Insurance Authority (IA), an independent statutory body, administers the Insurance Ordinance (Cap. 41) (IO) which provides the legal framework for the regulation of insurers and insurance intermediaries (agents and brokers) in Hong Kong.
In Hong Kong, insurance contracts are classified by reference to classes of insurance business which are listed in the IO. The IO prohibits any person from carrying on any class of insurance business in or from Hong Kong unless it is an authorised insurer, Lloyd’s, an association of underwriters approved by the IA or an exemption applies. There is no statutory definition for the phrase “carrying on…by way of business”. A person will be deemed to be carrying on business in or from Hong Kong if he opens or maintains an office or agency in Hong Kong for the purpose of carrying on that class of insurance business in or from Hong Kong or he holds himself out as carrying on that class of insurance business in or from Hong Kong.
The IO also contains certain restrictions whereby an authorised insurer cannot enter into a contract of insurance through another person in Hong Kong (including by way of referral) unless that person is appropriately licensed as an agent or broker.
 The phrase “carries on” and “by way of business” are not defined in the IO. A person will be deemed to be carrying on business in or from Hong Kong if he opens or maintains an office or agency in Hong Kong for the purpose of carrying on that class of insurance business in or from Hong Kong or he holds himself out as carrying on that class of insurance business in or from Hong Kong.
2 Are types of insurers regulated differently (i.e. life companies, reinsurers?)
The IO does not distinguish between direct insurers and reinsurers, as both come within the statutory definition of “insurer”. Direct insurers and reinsurers are therefore largely regulated in the same way, subject to certain exceptions. For example, a reinsurer may be authorised to carry on general and long term business, whereas direct insurers can only be authorised for either general or long term business. In addition, unlike a general insurer, a reinsurer is not required to maintain assets in Hong Kong.
3 Are insurance brokers and other types of market intermediary subject to regulation?
Yes. The statutory regulatory regime for insurance intermediaries, which replaced the previous self-regulatory regime, came into effect on 23 September 2019. The IA is now the sole regulator of all insurance intermediaries in Hong Kong.
The regulatory regime for insurance intermediaries is activity-based. Under the IO, a person must not carry on a regulated activity, or must not hold itself out as carrying on a regulated activity, in the course of business or employment, or for reward, unless appropriately licensed as an insurance intermediary (or otherwise exempt). Note that an insurance agent can only be appointed to carry on a regulated activity for a maximum of four authorised insurers, of which no more than two can be insurers authorised to carry on long term business. The 2019 changes also introduced a restriction on active marketing of insurance services to the Hong Kong public from outside Hong Kong (please see Q20 below).
4 Is authorisation or a licence required and if so how long does it take on average to obtain such permission? What are the key criteria for authorisation?
Any company wishing to carry on any insurance business in or from Hong Kong must apply to the IA for authorisation. Certain minimum requirements must be met, including in relation to paid-up capital, solvency margin, fitness and propriety of directors and “controllers” (as defined in the IO) and adequacy of reinsurance arrangements. Additional factors will also be taken into account by the IA, including the viability of the applicant’s business plan and physical presence in Hong Kong. The time required to obtain authorisation depends on the complexity of the case, and it can take anywhere from 4 to 18 months.
A person who is applying to be a licensed insurance intermediary is required to satisfy the IA that he/she/it is a fit and proper person. For a licensed insurance agency or a licensed insurance broker company (i.e. a corporate entity), its responsible officers, controllers, and directors are also required to be fit and proper persons and organizational competence requirements (e.g. corporate governance, internal controls and risk management) will apply. In addition, there are financial and other requirements for licensed insurance broker companies in relation to (a) capital and net assets; (b) professional indemnity insurance; (c) keeping of separate client accounts; (d) keeping of proper books and accounts; and (e) submission of audit and related information. There is no prescribed timeline for the application, but the process is generally significantly shorter than the authorised insurer application.
5 Are there restrictions or controls over who owns or controls insurers (including restrictions on foreign ownership)?
Provided that the insurer (whether local or overseas) can meet the authorisation criteria (including that its directors and controllers are fit and proper), there are no restrictions on who owns or controls the insurer. A change of control in an authorised insurer (the relevant threshold being 15% shareholding/voting power) requires prior approval of the IA.
6 Is it possible to insure or reinsure risks in your jurisdiction without a licence or authorisation? (i.e. on a non-admitted basis)?
An offshore insurer (not authorised in Hong Kong) can underwrite an insurance policy relating to a Hong Kong insured from outside Hong Kong, provided that in doing so the offshore insurer does not carry on insurance business in or from Hong Kong. The IO focuses on where the activity is taking place as opposed to the location of the risk in determining whether an entity is performing a regulated activity in Hong Kong. It is, therefore, technically possible to be a non-admitted insurer in Hong Kong.
7 Is a branch of an overseas insurer, insurance broker and/or other types of market intermediary in your jurisdiction subject to a similar regulatory framework as a locally incorporated entity?
Both Hong Kong incorporated entities (including subsidiaries of foreign insurers) and branches of foreign insurers are permitted to conduct insurance business in or from Hong Kong if they satisfy the relevant authorisation requirements and are granted a licence by the IA. The insurance regulatory regime in Hong Kong for insurers and insurance intermediaries is set out in the responses to Q1 and Q3.
Please note that a foreign insurer wishing to open a branch is required to satisfy the IA that it: (a) is a company incorporated in a country where there is comprehensive company law and insurance law; (b) is an insurer under effective supervision by the relevant authority(ies) of its home country; and (c) is a well-established insurer with international experience and of undoubted financial standing.
8 What penalty is available for those who operate in your jurisdiction without appropriate permission?
Penalties may be in the form of a fine and/or imprisonment (in the case of an individual) if (i) a person carries on any class of insurance business in or from Hong Kong without being authorised or otherwise exempt; and/or (ii) a person carries on or holds itself out as carrying on a regulated activity in the course of business or employment or for reward without an insurance intermediaries licence. Daily fines may be imposed for each day the offence continues
9 How rigorous is the supervisory and enforcement environment? What are the key areas of its focus?
The IA is given a range of powers under the IO to perform its supervisory and enforcement functions, including powers to conduct investigations against authorised insurers and regulated persons (including licensed insurance intermediaries) under the IO. The IA can take disciplinary action against an authorised insurer or a regulated person for misconduct, or if it considers that a person is not fit and proper to be a director or controller of an insurer (or a regulated person is not fit and proper). Sanctions which can be imposed by the IA include public or private reprimand, pecuniary penalties and suspension or revocation of licences.
Since the commencement of the new direct regulatory regime for insurance intermediaries, the IA has focused its enforcement efforts on the handling of investigations, disciplinary proceedings and appeal cases from the former self-regulatory organizations.
10 How is the solvency of insurers (and reinsurers where relevant) supervised?
(Re)insurers must currently comply with a rules-based capital adequacy framework, supervised and enforced by the IA, which provides that a (re)insurer must maintain an excess of assets over liabilities of not less than a required solvency margin.
General – solvency margin must be the greater of:
- 20% of relevant premium income up to HK$200 million, plus 10% of the amount by which the relevant premium income exceeds HK$200 million; and
- 20% of relevant outstanding claims up to HK$200 million, plus 10% of the amount by which the relevant outstanding claims exceed HK$200 million, subject to a minimum of HK$10 million (HK$20 million for certain statutory classes).
Life – solvency margin must be the greater of:
- HK$2 million; and
- Generally 4% of mathematical reserves plus 0.3% of capital at risk.
However, a risk-based capital regime is being introduced under which capital and solvency requirements are commensurate with the risks borne by insurers. The regime adopts a three pillar approach covering: quantitative aspects, qualitative aspects, and regulatory reporting and disclosures respectively. A public consultation is expected in 2021 on the draft capital rules in respect of the quantitative aspects (Pillar 1), with legislation expected to be introduced in 2022. For Pillar 2 (qualitative aspects), the IA’s guideline on enterprise risk management (GL21) took effect on 1 January 2020, with a new requirement for insurers to submit to the IA their first Own Risk and Solvency Assessment report for the financial year ending on or after 31 December 2020, with transitionary arrangements in place until Pillar 1 takes effect. A consultation on the disclosure requirements (Pillar 3) is expected in 2021.
As part of the new supervisory framework for multinational insurance groups which became effective on 29 March 2021 (see Q13), the Insurance (Group Capital) Rules also prescribe group capital adequacy requirements and supervisory reporting and public disclosures following the three pillar approach.
11 What are the minimum capital requirements?
See Q10. Currently the minimum paid-up capital requirements are:
As these are minimum required amounts, an appropriate buffer will be needed on top of this.
|Composite insurers (i.e. carrying on both general and life business) and insurers writing statutory classes (e.g. third-party motor and employee compensation)
|General and life insurers
12 Is there a policyholder protection scheme in your jurisdiction?
If an insurer becomes insolvent, there is currently no compensation scheme for life insurance policies and only compensation funds for two specific general insurance policies (covering employees’ work-related injury compensation and motor vehicle third party claims). However, policyholders have priority in the distribution of an insurer’s assets in the event of its insolvency.
The long-awaited bill to establish a policyholder protection scheme covering most types of direct life and non-life policies is expected to be introduced in 2021. Under the scheme, if an insurer becomes insolvent, the scheme would pay the first HK$100,000 of any claim and 80% of the remaining balance, up to HK$1 million per policy, per claim or per insured event, whichever is applicable.
13 How are groups supervised if at all?
The Hong Kong government recently introduced and implemented a group-wide insurance supervisory regime, which took effect on 29 March 2021.
The new regime enables the IA to exercise direct regulatory powers over Hong Kong-incorporated holding companies of insurance groups. The IA may designate a Hong Kong-incorporated holding company of an authorised insurer as a “designated insurance holding company” (DIHC), provided that the IA is the appointed group-wide supervisor of the insurance group and the IA considers it appropriate to do so. The DIHC itself is not required to be an authorised insurer. Upon designation of a DIHC, the IA will determine which members of the insurance group will be subject to the IA’s supervision, which may include companies which are incorporated outside Hong Kong. A DIHC is required to, among other things, comply with the relevant reporting, disclosure and capital requirements.
Similar to the old regime, new shareholder controllers (being persons entitled to exercise 15% or more of voting power), and the appointment of chief executives, directors and key persons in control functions, of a DIHC require the IA’s prior approval. A DIHC also needs to seek the IA’s prior approval for any major acquisition. In addition, the IA has a wide range of regulatory powers over DIHCs, including the power to obtain information and documents, restrict the transfer of assets among group companies, appoint a manager to manage the DIHC’s affairs, and conduct inspections and investigations to establish that the DIHC is compliant with its regulatory obligations under the IO. The IA may also take civil and criminal disciplinary action against a DIHC.
14 Do senior managers have to meet fit and proper requirements and/or be approved?
Approval from the IA is required for the appointment of controllers (including chief executive and managing directors) and directors of a Hong Kong-incorporated authorised insurer. No distinction is made between an executive director and a non-executive director. The IO also requires the appointment of key persons in “control functions” (which include risk management, financial control, compliance, internal audit and actuarial functions) to be approved by the IA. Controllers, directors and key persons in control functions must meet fit and proper requirements.
15 To what extent might senior managers be held personally liable for regulatory breaches in your jurisdiction?
If the senior manager is a controller, director or a key person in control functions of an authorised insurer or a controller, director or the responsible officer of an insurance intermediary, they can be held personally liable in respect of an offence committed by that insurer or insurance intermediary (as the case may be) if such an offence was committed with their consent or connivance or was attributable to any neglect or omission on their part.
16 Are there minimum presence requirements in order to undertake insurance activities in your jurisdiction (and obtain and maintain relevant licences and authorisations)?
All applicants (whether incorporated locally or not) seeking authorisation to carry on any class of insurance business must satisfy the IA that the applicant will maintain an office as its place of business in Hong Kong with professional management and staff appropriate to the nature and scale of its operations, and have a locally-based chief executive.
Further, the IO requires an insurer carrying on general business, other than a professional reinsurer and a captive insurer, to maintain assets in Hong Kong of an amount which is not less than the aggregate of 80% of its net liabilities and the solvency margin applicable to its Hong Kong general business.
17 Are there restrictions on outsourcing services relating to the business?
Outsourcing by insurers is generally permitted, subject to compliance with IA guidance (GL14) which applies to all outsourcing arrangements of authorised insurers incorporated or based in Hong Kong and for the Hong Kong operations of overseas insurers. An authorised insurer must notify the IA at least three months before entering into, or significantly varying, any material outsourcing arrangement. Essential issues to consider include having a board-approved outsourcing policy, conducting a risk and materiality assessment, and entering into a written agreement with the relevant service provider. The IA must be satisfied that all essential issues have been properly addressed. Within 30 days of entering into a material outsourcing arrangement, further details must be submitted to the IA.
18 Are there restrictions on the types of assets which insurers or reinsurers can invest in or capital requirements which may influence the type of investments held?
See Q11 for minimum paid-up capital requirements. An insurer must also maintain an excess of assets over liabilities of not less than a required solvency margin on top of minimum paid-up capital.
See Q16 for minimum presence requirements. The list of assets that qualify as Hong Kong assets is set out in the IO and includes cash, Hong Kong properties and specified financial instruments.
The IA has also published a guideline (GL13) on asset management by authorised insurers. The guideline provides a framework for developing an asset management system which appropriately manages the risks related to an authorised insurer’s investment activities.
19 How are sales of insurance supervised or controlled?
The Code of Conduct for Licensed Insurance Agents and the Code of Conduct for Insurance Brokers set out fundamental principles of professional conduct expected of licensed insurance agents and brokers when conducting regulated activities in respect of a client, including in relation to distribution activities. The IA also regularly refines existing guidelines, and issues new ones; for example, the guidelines governing the sale of long term insurance policies (GL25 to GL30) were recently issued relating to the offering of gifts, the sale of investment-linked assurance scheme products, policy replacements, benefit illustrations, cooling-off periods and financial needs analysis.
20 To what extent is it possible to actively market the sale of insurance into your jurisdiction on a cross border basis and are there specific or additional rules pertaining to distance selling or online sales of insurance?
As mentioned in the response to Q3, if a person actively markets insurance services to the Hong Kong public from a place outside Hong Kong, it is regarded as holding itself out as carrying on a regulated activity in Hong Kong and will therefore need to come onshore from a licensing perspective. There is no definition of “active marketing” under the IO, but we expect the regulator to apply similar standards as applied in the securities industry, which has had an equivalent provision for some time.
21 Are consumer policies subject to restrictions? If so briefly describe the range of protections offered to consumer policyholders
The Unconscionable Contracts Ordinance (Cap. 458) allows the Hong Kong court to strike down unconscionable contract terms in consumer contracts. This provision applies to insurance contracts.
In addition to the guidelines mentioned in Q19 regulating sales of insurance products to provide protection for policyholders in the event of an insurer’s insolvency, as mentioned in Q12, the Hong Kong government has introduced a proposal to establish a policyholder protection scheme covering most types of direct life and non-life policies, benefitting amongst others, individual policyholders.
22 Are the courts adept at handling complex commercial claims?
Yes. While there is no specialist court or civil litigation procedure for resolving insurance disputes, the courts in Hong Kong are experienced and adept at handling complex commercial claims.
23 Is alternative dispute resolution well established in your jurisdictions?
Yes. Arbitration is very well established in Hong Kong and Hong Kong is a very popular and well-respected arbitration venue, constantly vying with Singapore for the position of leading arbitration venue in Asia. The Arbitration Ordinance (Cap. 609) provides a user-friendly legal framework for arbitrations, which largely adopt the UNCITRAL Model Law. Arbitral awards made in Hong Kong are enforceable in more than 150 jurisdictions, including Mainland China. There are no special rules for resolving insurance disputes but parties may choose arbitrators with insurance experience and background from a list of arbitrators provided by the Hong Kong International Arbitration Centre.
Mediation is also a recognised form of alternative dispute resolution in Hong Kong. The Mediation Ordinance (Cap. 620) sets forth the model of mediation endorsed and practised in Hong Kong, and provides a regulatory framework for the use of mediation. Similar to arbitration, there are no special rules for resolving insurance disputes through mediation, but parties may choose a mediator with insurance expertise.
Adjudication is also available in Hong Kong. It involves an independent third party (usually an expert) making a decision, which will be binding on the parties. Adjudication is more commonly used in construction disputes.
24 Is there a statutory transfer mechanism available for sales or transfers of books of (re)insurance? If so briefly describe the process.
Yes. Procedures vary depending on the type of business being transferred.
If an insurer wishes to transfer the whole or part of its long term business by way of scheme to another authorised Hong Kong insurer, it may apply to the court, by petition, for an order sanctioning the scheme of transfer. Certain requirements must be met before the court will sanction a scheme, including publication of the petition in the Government Gazette and in newspapers (both English and Chinese language newspapers), preparation of a report on the terms of the scheme by an independent actuary which should be made available for inspection by anyone who is interested, and sending a statement summarising, among other things, the terms of the scheme to policy holders. The IA, and anyone who alleges that they would be adversely affected by the scheme, has the right to object to the proposed transfer. Therefore, in practice, the transferor should ensure that the IA has no objection to the proposed transfer before filing the petition. The court has the ultimate discretion to sanction a scheme.
General business portfolios may also be transferred by way of scheme to another authorised Hong Kong insurer under the IO. An insurer intending to transfer its general business under the statutory scheme may apply to the IA for its approval. Certain documents, including a report setting out the particulars of the transfer and an instrument of transfer, must be submitted to the IA for its consideration. The transferor must also publish a notice of transfer in the Government Gazette and in English and Chinese language newspapers, and send notices, and make certain documents available for inspection, to affected policyholders and interested parties, who have a right to object to the transfer. The IA has the ultimate discretion to approve the scheme.
25 What are the primary challenges to new market entrants?
The primary challenges to new market entrants are likely to be the onerous regulatory requirements and existing competition in the market.
A new market entrant intending to carry on insurance business in Hong Kong needs to apply to the IA for authorisation to do so. An applicant must demonstrate to the IA that, among other things, it meets all of the capital, solvency and local asset requirements, and that all of its directors and controllers meet the “fit and proper” test. An insurer must also demonstrate a minimum level of corporate governance, which will require an insurer to establish a corporate governance framework which provides for sound and prudent management of its business, and adequately protects policyholders’ interests. Putting in place an infrastructure that meets all of the regulatory and the IA’s requirements (which involves continuous communication with the IA before formally submitting an application for authorisation) takes time and money in the form of professional advisers’ fees, and can be challenging for a new market entrant.
Existing competition in the market is also a consideration for new market entrants. There are currently over 160 authorised insurers in Hong Kong, many of whom are already well-established in the market. According to the IA’s 2019/2020 annual report, 14 of the world’s top 20 insurers operate from and in Hong Kong.
26 To what extent is the market being challenged by digital innovation?
Traditional insurers still dominate the market but Insurtech is developing rapidly in Hong Kong and the IA continues to promote the development of Insurtech. There are currently four authorised virtual insurers in Hong Kong. They provide innovative and affordable insurance products to the market, such as voluntary health insurance policies, e-wallet insurance, and pet insurance policies.
As of August 2020, there were more than 30 Insurtech companies in the Hong Kong Cyberport community, a Hong Kong government-owned organisation which aims to promote digital innovation in Hong Kong. These companies provide a wide range of Insurtech products and services, such as big data analytics to help brokers assess a policyholder’s needs and coverage, insurance plan comparison services, and distribution of micro-insurances through mobile applications. It is worth noting that all four authorised virtual insurers were once members of Cyberport’s incubation programme.
There have also been many collaborations between Insurtech start-ups and traditional insurers to facilitate the digital transformation of traditional insurance business. These range from product design and distribution to claims processing. Increasingly, traditional insurers are outsourcing non-core operating processes to Insurtech companies to improve services and drive more competitive pricing.
27 How is the digitization of insurance sales and/or claims handling treated in your jurisdiction, for example is the regulator in support (are there concessions to rules being made) or are there additional requirements that need to be met?
The IA has been supportive of the development and application of technology in the insurance sector. It has launched a number of initiatives to promote the development of Insurtech in Hong Kong.
To help authorised insurers to experiment with new Insurtech initiatives, the IA launched the “Insurtech Sandbox” in 2017 to facilitate a pilot run of innovative Insurtech applications to be applied to the insurers’ business operations. Insurers would thus be able to gain real market data and collect user feedback before formally launching any Insurtech initiative into the market. As of June 2020, 13 pilot trials had been granted by the IA, including five relating to virtual on-boarding initiatives.
Another initiative launched by the IA is “Fast Track” – an expedited and streamlined process for applications by new insurers who use solely digital distribution channels for authorisations to carry on insurance business in Hong Kong. While Fast Track is an expedited application process, the IA still requires the insurer to meet all of the solvency, capital and local asset requirements and for all policyholder protection measures (to the extent applicable to direct digital sales) to be in place. An insurer authorised under Fast Track would not be permitted to accept business from other channels other than its own proprietary digital distribution system, and the IA may impose certain other restrictions or conditions on the products that may be sold online. For long term businesses, to ensure that there is adequate insurance experience among the shareholder controllers, at least one shareholder controller has to be an authorised insurer in Hong Kong (or another jurisdiction with information exchange arrangements with the IA). Since the launch of Fast Track in September 2017, the IA has granted authorisations to four virtual insurers.
In addition, the IA has established the Insurtech Facilitation Team to enhance communication with Fintech businesses and the Future Task Force to explore the future of the insurance sector and make recommendations.
28 To what extent is insurers' use of customer data subject to rules or regulation?
The main legislation on customer’s personal data in Hong Kong is the Personal Data (Privacy) Ordinance (Cap. 486) (PDPO). The PDPO regulates the collection, use and handling of personal data by insurers as “data users”. The Privacy Commissioner for Personal Data (the Commissioner) is responsible for PDPO compliance. However, in recent years other industry regulators, including the IA, have focused more on data protection. Both the Commissioner and the IA have also published guidance for the insurance industry on handling customers’ personal data and related matters.
Potential amendments to the PDPO were discussed by a Legislative Council panel in January 2020. Such amendments, if enacted, would institute a mandatory data breach notification system, empower the Commissioner to impose administrative fines and increase the maximum level of criminal fines, but no timetable has been proposed for the adoption.
Additionally, given that Hong Kong is also a major international finance centre with many insurers having ties to the EU or customers who are EU citizens or residents, insurers also need to consider the EU General Data Protection Regulation given its extra-territorial reach in certain circumstances.
See also Q17 for outsourcing.
29 To what extent are there additional restrictions or requirements on sharing customer data overseas/on a cross-border basis?
None currently. Section 33 PDPO contains restrictions on transfers of personal data outside Hong Kong unless certain conditions are met. However, this section has not yet come into force, having been pending since the PDPO was enacted in 1996.
30 Over the next five years what type of business do you see taking a market lead?
As noted in Qs 26 and 27, Insurtech and digital innovation is prompting change in the industry, including the emergence of virtual insurers who rely only on digital distribution channels. We expect this trend to continue, impacting all aspects of the industry and creating opportunities, and with such changes being accelerated by COVID and the IA’s continued support of Insurtech.
We also expect opportunities for Hong Kong’s (re)insurers arising from cross-border initiatives, such as the eagerly-awaited “Insurance Connect” scheme, which is part of the Guangdong-Hong Kong-Macao Greater Bay Area integration project, as well as opportunities arising from the Belt and Road Initiative and increasing co-operation between regulators.
Hong Kong also aims to be a hub for insurance-linked securities (ILS), leveraging Hong Kong’s developed capital markets amongst other things. The framework for ILS was put in place on 29 March 2021, when the Ordinance was amended to include ILS provisions and certain ancillary legislation took effect. The IA is currently working on the regulatory regime, with a view to enabling the first ILS issuance in Hong Kong within 2021. To encourage the issuance of ILS in Hong Kong, the government also proposed a two-year Pilot ILS Grant Scheme in the 2021-2022 budget, with a cap of HK$12 million for each issuance depending on the maturity of the ILS.
The IA is confident that the above initiatives (amongst others, such as tax concessions for the insurance sector) will cement Hong Kong’s position as a risk management centre and regional (re)insurance hub.
Finally, we also expect to see the continued growth in the use of transactional insurance products, such as warranty and indemnity insurance, in M&A transactions post-COVID, in part due to the anticipated recovery of M&A activity, but also resulting from increased distressed M&A activity, where such products can help to get deals done which might otherwise fail.