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17 Nov 2017

Stock-take on the new Hong Kong insurance regulation regime


In order to enhance its standing in the international insurance community, in 2015 the Hong Kong government initiated a wholesale reform of the insurance industry.

The central plank of the reforms is the establishment of a new independent regulator for insurers, brokers and agents. On 7 December 2015, the Insurance Authority (“IA”) was established as a regulator to (a) conform Hong Kong's insurance industry to international standards for insurance regulation, and (b) be financially and operationally independent.

Following an initial transition period, with effect from 26 June 2017 the IA assumed its first phase duties, taking over from the Office of the Commissioner of Insurance (“OCI”) in regulating insurers. The OCI has now ceased to exist. In the next phase, projected to take place within the next two years, the IA is to take over the regulation of insurance intermediaries (i.e., the agents and brokers), replacing their current self-regulatory regime.

Five months into the operation of the new regime for insurers, this note takes stock of the measures introduced by the new regime.

Powers of the IA and relevant rules

In order to achieve the enhancement of Hong Kong’s standing in the international insurance community, it was seen as important that the new IA was provided with sufficient powers over insurers and that those powers were in-line with comparable insurance regulatory regimes in insurance centres such as the UK and Singapore.

To achieve this, practices in other jurisdictions were drawn on, but in large part Hong Kong was able to look for guidance to the powers for regulating licensed corporations held by the Securities and Futures Commission (“SFC”) in Hong Kong.

The powers available to the IA have their basis in an amended statute – the Insurance Ordinance (Cap. 41) (“Ordinance”) – which replaces the old Insurance Companies Ordinance. In addition, the 17 existing guidance notes and guidelines (“GN” and “GL”) issued by the OCI continue to have effect. With the exception of the changes to GN 4 on fit and proper criteria (discussed further below) only technical amendments have been made to the guidance notes to update references to the law and bring terminology in line with that of the IA. A new guideline (GL 18) sets out the IA’s considerations in exercising the power to impose pecuniary penalties on authorised insurers. The updated guidelines GL 1 to 18 have been in effect from 23 June 2017 and can be accessed on the IA’s new webpage here.

Authorisation and supervision

The new Ordinance provides a number of new powers for the IA, greatly reinforcing those previously available to the OCI.

Reflecting the steps taken by financial regulators globally to hold accountable all responsible individuals, there is now a newly introduced concept of “key persons in control functions” of authorised insurers, which captures individuals who wield responsibility for one or more of the “control functions” of authorised insurers, including intermediary management, risk management, financial control, compliance, internal audit and actuarial matters (see s.13AE of the Ordinance). It is now a requirement that these key persons in control are authorised by the IA. The IA will only authorise such a person if he/she is “fit and proper”, by reference to the criteria set out in the Ordinance and GN 4.

The application requires details of the relevant person’s position and reporting lines and evidence that they meet the “fit and proper” requirements laid out in GN 4.

This is a significant legal change under the new regime - personal liability now rests with individual members of senior management in addition to the Directors and the Chief Executive Officer. The measure reflects similar provisions across the financial industry, (see, for example, the new Manager-In-Charge regime instituted by the SFC in December 2016 for SFC-licensed entities).

The IA has updated the guidance note on the fit and proper criteria (GN 4) to incorporate the new provisions of the Ordinance on factors which the IA must have regard to when determining whether a person is fit and proper, and to incorporate Insurance Core Principle 5 on Suitability of Persons issued by the International Association of Insurance Supervisors.

Applications for the approval of existing key persons were required to be submitted to the IA by 30 September 2017.

Investigative and disciplinary powers

Based on similar powers available to the SFC, under the Ordinance the IA now has considerable powers to, amongst other matters:

  • conduct inspections;
  • conduct investigations where it has reasonable cause to believe that there may have been a breach of the Ordinance, fraud or misfeasance, or it has reason to investigate compliance with the fit and proper requirements;
  • apply for a search warrant to enter premises to search for, seize and remove documents;
  • impose disciplinary sanctions such as:
    • issuing a reprimand;
    • revoking or suspending an authorisation;
    • imposing a fine on an authorised insurer up to the greater of HK$10 million or three times the profit gained or loss avoided as a result of the misconduct ; and
  • prosecute offences under the Ordinance in its own name.

In relation to the imposition of a fine, under GL18, the stated purposes of a fine include promoting and encouraging proper standards of conduct and deterring engagement of persons who are not fit and proper. Factors that the IA will consider when imposing a fine (and the amount of such fine) include the nature and seriousness of the conduct being punished, the behaviour of the authorised insurer since the conduct was identified and the previous disciplinary record of the authorised insurer.

Future developments

We are now only five months into the running of the new IA with its newly conferred powers, but it is likely that we will see a more structured approach in the regulation of insurers, including regular inspections. 

Specifically, there are two headline changes to come in the near future.

The first addresses the need for the IA to be financially independent: From 1 January 2018, the IA will start collecting a premium levy from policy holders. The levy rate will start at 0.04% of the insurance premium per policy year and increase gradually to 0.1%by 2021. The amount of levy imposed on each policy will be subject to a cap.

The second key change is, as previously mentioned, the replacement of the current self-regulatory regime for intermediaries with direct regulation by the IA. In fact, the new licensing regime will extend beyond existing brokers and agents to apply to any persons carrying on “regulated activities”, which activities are widely defined. Given that nearly all insurance processes are captured by the definition, it seems possible that many employees of insurers that carry out these activities will need to be licensed in the future (separately from any existing licenses which they may require).

More generally, the IA is playing a key role in keeping Hong Kong at the forefront as a financial centre. At the date of this briefing the IA is pushing forward on a number of initiatives, particularly:

  • Fintech/Insuretech (in which regard the IA has entered into a co-operation agreement with the UK Financial Conduct Authority to enhance collaboration in supporting fintech innovation).
  • A risk-based capital regime.
  • Enhancing the public’s understanding of insurance.

Future sales and distribution channels using technology are a hot topic. Online aggregators, automated quotation and tailored insurance contracts are continually being introduced, all driven by customer demand. Such platforms are surely set to become the norm for the market. The IA is aware that it needs to aim to be one step ahead of this fast-paced development and retain its authority, particularly in ensuring that the service providers are treating customers fairly.


Authorised insurers will already have taken many steps to embrace the new regime, but this continues to be a period of development and change so stakeholders should continue to:

  • review their existing internal controls and policies and ensure that they are sufficient, properly in place and are being complied with;
  • ensure that there are proper record keeping and audit trails;
  • ensure that there are processes in place for responding to inspections and investigations by the IA;
  • providing key persons in control positions with proper briefing, training and updates on their responsibilities; and
  • provide training generally to staff on internal policies, key regulatory requirements as well as how to respond to inspections and investigations by the IA.


Paul Westover

Paul Westover

T:  +852 2533 2755 M:  +852 6907 1885 Email Paul | Vcard Office:  Hong Kong

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