Insurance Authority: Stage 2 and beyond

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Following a smooth “D-day”, the war is there to win for the new insurance watchdog by imposing smart regulation and turning Hong Kong into the Asian insurance hub. (Photo credit: Chris Lusher)

The Independent Insurance Authority (IA) began regulating insurance companies on 26 June 2017, as announced in a government press release earlier this year. The newly established IA, an independent statutory body, has succeeded the Office of the Commissioner of Insurance (OCI), a government department, and within two years will replace the three self-regulatory organisations (SROs) that regulate insurance intermediaries through statutory licensing. The local insurance industry seeks to nurture the IA to influence the direction of the new regulatory system, but this also raises concerns over increases in compliance costs and requirements that may hinder the competitiveness of the industry as a whole.

The Independent IA was established by the Amendment Ordinance to “comply with the requirement of the International Association of Insurance Supervisors (IAIS) that insurance regulators should be financially and operationally independent of government and industry,” according to a legislative council brief. In addition, there are numerous statutory functions of the IA, with a principal function of “regulating and supervising the insurance industry for the promotion of the general stability of the insurance industry and for the protection of existing and potential policyholders.” The IA aims to be fully self-funded within the next 4 years, where levies will be introduced and imposed on insurance premiums from policyholders. An incremental approach will be taken, where the levy rate will increase on a yearly basis from 0.04% to the target of 0.1%, accounting for 70% of the IA’s total expenditure.

The proposed levies, commencing on 1 January next year, may impact the competitiveness of the industry, though specific sections of the industry will be exempt from the levy to promote growth and competitiveness. Caroline Thomas, Partner at Hill Dickinson and chair of The Hong Kong Insurance Law Association Ltd, expresses her personal views to us: “Whilst currently Singapore clearly is the insurance hub in Asia, Hong Kong remains a very strong player in marine insurance. Thus, promoting Hong Kong as a marine insurance hub is obvious and indeed something the government seems to have on its agenda including considering exempting marine, aviation, reinsurance and captive business from the IA levy.”

Hong Kong strives to be the insurance and financial hub of the Asia Pacific region, as both industries complement one another. Though with the new compliance requirements under the revised version of the Guidance Note on the Corporate Governance of Authorised Insurers (GN10), such as the establishment of a risk committee and a minimum number of independent non-executive directors (INEDs), will in turn require companies to adapt and shift or increase resources towards risk management and compliance, according to an article published by Thomas Reuters Accelus. The OCI began preparations for the implementation of the Risk-Based Capital (RBC) regime in 2015, though the phased-in implementation of the regime will be post-2020, carried through by the IA. The implementation of the RBC regime will add to compliance costs and earning capabilities of insurance companies, affecting the industry’s competitiveness.

Currently, capital outflow from mainland China has been limited, particularly due to the restriction of UnionPay card holders buying insurance policies that include “investment-related contents”. Policies that cover accidents, deaths and illnesses are however permitted. The restriction conflicts with the Mainland and Hong Kong Closer Economic Partnership (CEPA), which is a free trade agreement that covers trade in goods, services and investment. This is partly due to the recent instability of the Chinese yuan, but business insiders predict the re-opening of the Chinese capital account as the currency stabilises.

Hong Kong’s insurance industry in cooperation with the IA, should look towards promoting Hong Kong as an insurance hub by developing a regulatory framework which facilitates international business activity. “If a regulator is able to achieve the right balance of regulation – in that foreign regulators trust it to do its job (equivalency) and insurance companies nonetheless feel relatively more able to do business – then that jurisdiction may find itself chosen as a regional hub,” explains Thomas. “Smart regulation is about reducing the administrative burden and simplifying existing regulation whilst simultaneously achieving the same regulatory intent.”

‘Smart’ regulation goes hand-in-hand with one of the IA’s statutory functions, which will also enhance the attractiveness of Hong Kong as a financial hub: “formulate effective regulatory strategies and facilitate sustainable market development of the insurance industry, and promote the competitiveness of the insurance industry in the global insurance market.” Many companies in the past, both in banking and insurance, have shifted their headquarters from Hong Kong to other financial hubs in the region or internationally, partly due to regulatory pressures.

To achieve the aspirations of the industry, communication and influence between industry and the IA is crucial. “The Future Task Force of the Insurance Industry (“FTF”) has been set up to work hand in hand with the IA in exploring the future of the insurance industry,” Thomas adds. “Moreover the IA has helpfully made it clear from the outset that it is very open to dialogue and it seems that the government and IA are already considering suggestions made by the industry.” The IA, as the regulating body of the industry, should strike a balance between the roles of a regulator, facilitator and a promoter of the industry. Local insurance insiders also feel that greater transparency in terms of statistics, would be mutually beneficial for companies in the industry.

Globally, there is an issue regarding the image of the insurance industry; millennials and the younger generations have the impression that having a career in insurance is “static, dull, repetitive and even depressing”, as described in an article published by The Innovation Enterprise. There is also a sense of insurers ‘cheating’ people into buying unnecessary policies. The number of young recruits entering the industry is falling, resulting in the average age of workers to rise, hence eventually decreasing the amount of qualified and skilled workers in the industry. To maintain a competitive insurance industry, there must be a constant influx of new talent as achieving expertise in certain fields of insurance takes years of experience. In terms of education, insurance can be taught and promoted further in higher education institutions in Hong Kong to drive interest. Digital spaces in the industry tend to be more attractive to the younger generation, hence the promotion of InsurTech and digitalisation of insurance activities can be an effective promoter.

Hong Kong effectively facilitates innovation in InsurTech, due to the nature of its economy. Companies such as FWD, AXA and AIA are at the forefront of developing InsurTech in Hong Kong. The regulating bodies, in addition to the IA, the SFC, and HKMA, are mature regulators which prefer to streamline regulations and promote the efficiency of the industry, which in turn facilitates the development of InsurTech. Though, according to a Fintech Hong Kong article earlier this year, less than 1% of life insurance sales are made digitally, hence showing that Hong Kong’s InsurTech environment is still in its early stages.

Since the Anti-Money Laundering (AML) legislation was put in place to combat money laundering and terrorist financing within the insurance industry, companies have had to abide to certain regulatory requirements. Many issues arise from mainland Chinese investors, due to the uncertain origin of funds. InsurTech such as distributed ledger technology (DLT) can not only enhance tracing the origin of money, but also streamline and automate ‘know your client’ (KYC) requirements, promoting customer satisfaction, business efficiency, and integrity.

There is vast potential that follows the development of InsurTech. Thomas comments: “The Hong Kong Insurance Law Association Ltd, which I chair, is about to launch a 5-part series on [InsurTech]. There are many possible applications – AML is just one and possibly not the most important. Analysing risk, pricing, handling claims, and preventing fraud are others. There are many projects at the moment for example to make underwriting and broking paperless and more accurate.”

Looking forward, it is a dynamic period for the insurance industry in Hong Kong; the industry in cooperation with the new and growing IA can push and develop several areas, promoting the competitiveness and attractiveness of the industry within the region. In terms of the FTF, Thomas elaborates that there are at present three working groups under it that look into three respective important scopes that are shaping the future of the industry: Financial Technology (“Fintech”), Risk-based Capital Regime and image building (which is not merely about public relations, but about projecting a proper image of the industry to the public). Similar to the recent bond-connect, insurance-connect in partnership with mainland China can be an effective direction to pursue, as Hong Kong would position itself as the intermediary between China and the global market for insurance.