The transformation of the Hong Kong insurance market began on 7 December 2015 when the first part of the Insurance Companies (Amendment) Ordinance (“ICAO”) came into force.
The new law, designed to make Hong Kong’s insurance industry more competitive, strengthen policyholder protection and comply with the international principle that regulators be operationally and financially independent from government and industry, overhauls Hong Kong’s current regulatory framework.
Two fundamental changes
The ICAO makes two fundamental changes, it:
- establishes an independent insurance authority (IIA);
- replaces the self-regulatory insurance intermediary regime with a statutory licensing and regulatory regime administered by the IIA.
The IIA will be an independent entity whose two principal regulatory functions are prudential (financial soundness) regulation and conduct regulation. Its statutory functions will include promoting “sustainable market development” and the industry’s competitiveness, and assisting in “maintaining the financial stability of Hong Kong”.
The new statutory regime to regulate intermediaries (insurance agents and brokers) draws on concepts used in other financial services regimes in Hong Kong introducing an activity-based regime whereby those carrying out “regulated activities” must be licensed and applies statutory conduct requirements.
Other changes enhance corporate governance standards across the industry; deal with the role and duties of insurance intermediaries; grant new powers of inspection, investigation and disciplining of licensees and regulated persons to the IIA, strengthening the regulator’s existing powers; and introduce levies and fees to fund the IIA (so it will be self-funding).
New regime will be fully implemented by early 2019
The new regime is being introduced in three stages:
- the first stage (to be completed by end-2015 and implemented by the changes brought into force on 7 December 2015) establishes the Provisional Insurance Authority (PIA), an interim body without regulatory functions which will co-exist with the Office of the Commissioner of Insurance (OCI);
- the second stage (to be completed by end-2016) is for the PIA to become the IIA, which will replace the OCI in its entirety;
- the third stage (to be completed by end-2018/early 2019) is to replace the intermediary regime administered by current self-regulatory organisations (Professional Insurance Brokers Association, Confederation of Insurance Brokers, Insurance Agents Registration Board).
In line with IAIS’ mandate
The ICAO should make Hong Kong more attractive and therefore more competitive as a hub for international and regional insurance groups, in particular, the International Association of Insurance Supervisors’ Insurance Core Principles mandated the establishment of the IIA. It also more closely aligns Hong Kong’s approach across its various financial services sectors, in particular, its regulation of the securities industry.
The ICAO should also improve standards, ultimately promoting policyholder protection, and therefore should be seen as a positive development from the perspective of end users. It does, however, create a greater compliance and administrative burden for insurers and, in particular, intermediaries generated by enhanced corporate governance and fitness and probity requirements, which, if they become too unwieldy and costly, could drive smaller insurers or intermediaries out of the market, ultimately reducing competition.
The right balance will need to be achieved through the IIA’s implementation of the new rules and its approach in the coming years will be watched closely by all those with a vested interest.