New insurance watchdog needs teeth and a brain

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Guidelines for intermediaries and employees of insurers and collection of levy are among the key concerns for the industry.

The insurance industry has vowed to engage proactively with a new regulatory body set to become functional a month from now.

26 June, 2017 – nicknamed the “D-day” – saw the Independent Insurance Authority (IIA or IA) replacing the current Office of the Commissioner of Insurance (OCI) as the top watchdog over insurance companies. This was the second stage following the establishment of the authority itself in accordance to the Insurance Companies (Amendment) Ordinance 2015 in December 2015. Within two years from the D-day, the IIA will also set up a statutory licensing regime to eventually take over the regulation of insurance intermediaries from three self-regulatory organisations (SROs).

This comes amid double-digit growth of the Hong Kong insurance industry in recent years. Total gross premiums of the industry in 2016 amounted to $448.8 billion, representing an increase of 22.7% over 2015.

“There is no dispute that the regulatory regime needs to be updated in tandem to meet new challenges […] to enhance policyholder protection and provide a modern and more conducive environment for sustainable development of the industry,” Secretary for Financial Services and the Treasury Professor KC Chan stated at International Actuarial Association Life Section Colloquium 2016. “The establishment of a new regulator will bring in a more accountable framework for promoting compliance and transparency in regulation.”

In essence, the move is a major step to bring both insurance companies and 80,000-odd intermediaries under one single regulator which will also assume the roles of an inspector and an investigator. Under the new ordinance, which will be renamed Insurance Ordinance, the IIA’s regulatory, investigatory and enforcement powers will be substantially enhanced compared to its predecessor.

“[I]t is evident that the IIA will be empowered to adopt a robust watchdog role similar to that of the financial industry’s Securities and Futures Commission and the banking industry’s Hong Kong Monetary Authority,” Kevin Bowers, partner at local law firm Howse Williams Bowers wrote on International Law Office.

It however remains uncertain over how the IIA will put the powers into practice despite the Office of the Commissioner of Insurance issuing three guidance notes on the corporate governance of authorised insurers in the past year with protection of the interests of policyholders as the overarching principle. For the industry’s part, it is actively liaising with the regulator to construct a “simpler, more flexible and less onerous” regulatory package.

The industry is also approaching the regulator over how intermediaries will be licensed and regulated in two years’ time. Among other issues, the industry is asking for further clarification over the definition of of “regulated activity” for employees of insurers as revised under the Insurance Ordinance to include “inviting or inducing, or attempting to invite or induce, a person to make a material decision” or enter into a contract of insurance instead of merely negotiating or arranging the contract.

“We are not starting from scratch,” Peter Tam, chief executive of the Hong Kong Federation of Insurers, claims. “We already have the SROs with all sorts of regulations in place. They have been developed and refined over a long period of time with a functioning penalty framework. That’s why we have been proposing to move the existing regulations – with appropriate modifications – to the new regime and use them as the reference point for any new provision.”

Tam adds that the industry will also keep a close watch on how a new levy on insurance premiums, to be imposed on policyholders and collected by insurers to remit to the IIA starting from 1 January, 2018, will be executed in addition to new arrangements to collect authorisation fees from insurance companies and user fees.


Insuring the insurance industry

The IIA, as Tam notes, is also tasked to formulate strategies which will facilitate sustainable market development and promote the competitiveness of the insurance industry in the global market.

In this respect, IIA Chairman Dr Moses Cheng stressed in the first annual report published in November 2016: “The most important questions are how we can harness the power of innovation to the benefit of consumers and how technology can spur constructive growth of the industry through innovative service and enhanced efficiency. The challenge, as always, is to strike a reasonable balance among competing considerations. In the long run, the Authority has the vision to strengthen Hong Kong as an Insurance Hub in the Asia-Pacific region. To this end, a task force will soon be set up to explore the future of the insurance industry in Hong Kong […and] to draw up recommendations to promote the sustainable development of the insurance industry and to protect the interests of policyholders.”

Meanwhile, incoming chief executive Carrie Lam has pledged to promote insurance education for students in schools and the public to address the shortage of skilled personnel during an election forum organised by the HKFI in March. The lack of skilled personnel could be reflected by the recent appointment John Leung Chi-yan, the incumbent Commissioner of Insurance, as the CEO of the IA for a term of one year after failing in its search for a suitable candidate to fill the post.

Now with the broad picture sketched and key persons in position, Tam says the insurance industry will stay alert on the uncertainties over implementation works in practice following the D-day.

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