Posted on Feb 02, 2012 by Sergio Ulloa
Big changes could soon be underway in Asia's premier insurance centre. The Hong Kong government announced this week that they are planning to implement a new national insurance fund that would protect policyholders from insolvent insurers after reviewing the results of a three-month long public consultation.
Hong Kong insurance authorities surveyed public and stakeholder opinions on the proposed establishment of an insurance policyholders' protection fund (PPF) from March to June 2011. Respondents were quizzed on four key areas of the proposed scheme - coverage, level of compensation, funding models and governance arrangements. Taking into account the comments received, the final proposals were collated and published on the government website
, and plans are now underway to introduce the PPF bill into the Legislative Council during the 2012-13 legislative session. If approved, the fund would not likely be established until fiscal 2013-14 at the earliest.
Hong Kong's Secretary for Financial Services and the Treasury, Professor KC Chan, said in a statement that the proposed insurance fund would enhance "the stability and competitiveness" of the Hong Kong insurance industry, while minimizing the risks of moral hazard. Chan added that "we are pleased to note that there is support from the general public and industry for the establishment of a PPF and most of the key elements of the consultation proposals."
Under these new proposals, all authorized Hong Kong insurance companies would be required to participate in the PPF, which will in turn be comprised of separate life and non-life schemes. The PPF will be run by an independent board, with an initial target size of around HK$1.3 billion (US$168 million), that will focus on covering individual policyholders and building owner's corporations in Hong Kong. If an insurer becomes insolvent, the PPF will work to transfer all existing life, accident and health insurance policies with guaranteed renewability to a replacement Hong Kong insurer. For non-life policies, the fund will provide full compensation for the entire coverage period until expiry. Ceding to industry feedback however, the PPF Board will have the power to grant exceptions to companies who can provide a similar protection to Hong Kong-based policyholders via an existing compensation scheme overseas.
The government has also considered adding local small and medium-size enterprises (SMEs) to the list of potentially insured entities under the PPF, identifying that they usually have less resources available to assess the insurer solvency and are less capable of protecting their own interests. SME policyholders may also soon be allowed to specifically insure their exports for places and buyers of their choice under certain circumstances, and could also be offered various premium discounts through a separate government initiative.
Abiding by the consultation proposals, the Hong Kong government has set the compensation limit for each insurer at HK$1 million (US$129,000). Industry analysts observed that any further increase in the compensation limit would merely lead to a surge in levy rates without necessarily contributing any notable enhancements in terms of policyholder protection. The government noted as well that the proposed compensation limit, as is, should be able to meet 90 to 100 percent of claims generated from in force life policies, as well as be able to fully cover the claims of around 96 percent of non-life policies. Once the fund is established, policyholder compensation will be 100 percent for the first HK$100,000 (US$12,900) of any claim, plus 80 percent of the balance up to the limit.
The PPF fund will incorporate a progressive funding mechanism that charges a moderate initial levy on participants followed by a "stepped-up" levy once any insurer becomes insolvent and pay-outs are merited. The initial levy rates of the fund will be 0.07 percent on applicable premiums and will be collected from Hong Kong-based insurers directly. According to the government proposal document, the initial target fund size for the life insurance scheme will be HK$1.2 billion (US$150 million), with HK$75 million (US$9.67 million) allocated for the non-life insurance scheme. Both funds are expected to be achieving their respective fundraising goals within the first 15 years of service. Once national insurance funds are in force, the Hong Kong government claimed they would regularly meet with local insurance industry professionals, using PPF data to review and adjust levy rates as well as the fund's overall size accordingly. It is in the scheme's long term interest to strike a balance between enhancing protection for policyholders and minimising the additional burden placed on the Hong Kong insurance industry.
The overall goal of the PPF is to provide a safety net for Hong Kong policyholders when an insurer becomes insolvent. Hong Kong regulators have outlined quite an ambitious set of reforms for the city-state's financial sector. The PPF move follows measures introduced last month to liberalize yuan capital requirements for local banks
, as well as the planned overhaul of the country's mandatory provident fund scheme (MPF), which will allow local employees to choose the MPF provider they want to invest with. Currently, employees in Hong Kong contribute 5 percent of their salary, capped at HK$1,000(US$130) per month, into their MPF retirement account. This contribution is then matched by employers, who have had sole power to choose the MPF provider. This will change in November 2012, when the MPF Schemes Authority enacts the Employee Choice Accounts and puts the choice of MPF provider in the hands of employees. The government hopes the scheme will put performance and fee pressure back on MPF providers, and foster a whole new financial market to stimulate the local economy. This could in turn put downward pressure on Hong Kong medical insurance
rates and other financial products as well.
Life, Automobile and Health insurance continues to be an integral part of the Hong Kong economy. Despite volatile equity markets, Hong Kong's insurers managed to keep pace
with the double-digit growth rates seen in several Asia-Pacific markets last year. According to the latest figures made available on the Office of the Commissioner of Insurance (OCI) website, the Hong Kong insurance industry recorded HK$172.8 billion (US$22.2 billion) in gross written premium for the first three quarters of 2011, a 12.6 percent annual growth rate, with underwriting profits rising from HK$1.7 billion (US$220 million) to HK$2.1 billion (US$270 million) in that period as well. While these substantial growth rates may not continue during a tepid 2012, Hong Kong's insurance companies are sure to benefit from the business potential for insurance made available across Asia-Pacific markets and Mainland China in particular.
The Hong Kong Office of the Commissioner of Insurance is a government body that works to represent the interests of policy holders and to ensure the continued stability of the insurance industry in Hong Kong. The OCI was established in June 1990.