Main Features

At year-end, there were 181 authorised insurers, 91 of which were incorporated in Hong Kong while the remaining 90 were incorporated on the Mainland and in 21 overseas countries, with the United States taking the lead.

The total gross premiums of the insurance industry reached $137 billion in 2005, representing 13.2 per cent growth over 2004. However, gross premiums of the general insurance sector slightly decreased by 1.4 per cent to $22.5 billion in 2005, with general liability continuing to register a double digit percentage decline due to keen competition in employees' compensation business. Overall underwriting performance improved from a profit of $2.22 billion in 2004 to $2.50 billion in 2005.

The long-term insurance business continued to attain double-digit annual growth from 1991 to 2005, with office premiums increasing by 16.6 per cent to $114.8 billion in 2005. The individual life business remained dominant with the office premiums in force of $98.2 billion, accounting for 85.6 per cent of the total office premiums. The number of individual life policies in force grew by 8.9 per cent to 6.6 million in 2005.

At year-end, there were 30 201 insurance intermediaries, including 29 715 agents (of whom 1 815 were agency firms) and 486 brokers.

Insurance Authority

The Commissioner of Insurance, appointed by the Chief Executive as the Insurance Authority (IA), has the principal function (under the Insurance Companies Ordinance (ICO)) to regulate and supervise the insurance industry to promote its general stability and protect existing and potential policy holders.

The ICO, which prescribes a comprehensive regulatory framework for all classes of insurance business, has two main objectives of ensuring the financial stability of all insurers authorised in Hong Kong and the fitness and propriety of their management. These objectives are achieved through the prescription of, inter alia, minimum share capital and solvency margin requirements, as well as the requirement for directors and controllers of insurers to be fit and proper persons.

A general business insurer is also required to maintain assets locally to meet the claims of Hong Kong policyholders. For life insurance business, an appointed actuary system is in place to ensure that the insurer would be able to meet its obligations.

Prudential supervision of insurers is carried out mainly through examination of the financial statements, actuarial reports and other returns submitted by insurers and regular on-site visits. The IA may take appropriate action under the ICO against an insurer to safeguard the interests of policyholders. These measures include limitation of premium income, placing of assets in the IA's custody, assumption of control by a manager appointed by the IA or petitioning for winding-up of the insurer.

Insurance intermediaries have been subject to regulation under the ICO since 1995. An insurance agent must be properly appointed by an insurer, who is required to comply with the Code of Practice for the Administration of Insurance Agents in appointing and controlling its agents. Moreover, an insurance broker must meet certain minimum requirements to become eligible for authorisation.

Self-regulatory measures are in place to strengthen market discipline in the insurance industry. These measures, formulated by the insurance industry in consultation with the IA, include the adoption of a Code of Conduct for Insurers governing the writing of insurance contracts and insurance benefit illustration standards for life insurance policies.

As a member of the International Association of Insurance Supervisors, Hong Kong endeavours to ensure that its supervisory regime is in line with prevailing principles and standards. It has also established an Insurance Advisory Committee, as provided for in the ICO, comprising representatives drawn from the industry.

Recent Developments

The IA reviews its regulatory framework from time to time to keep up with market development and international trends. In so doing, it maintains a close liaison with industry bodies and other regulators. Based on operational experience and a related consultancy study commissioned by the Mandatory Provident Fund Schemes Authority (MPFA), the IA issued in December 2006 the second edition of GN7 — 'Guidance Note on the Reserve Position for Class G of Long Term Business' to reinforce and enhance the required standard of provisions for this class of business.

The IA oversees and carries out regular assessment on effectiveness of the self-regulatory system for insurance intermediaries. In 2006, the relevant self-regulatory organisations have strengthened their on-site inspections of insurance intermediaries and further revised the Code of Practice for Life Insurance Replacement to allow life policyholders to be better informed of the implications of a policy replacement. The IA will continue to liaise with parties concerned to provide enhanced protection for the insuring public.

To provide more convenience for the public to obtain travel insurance, the IA introduced a new regulatory system for travel agencies and their staff to be registered as 'travel insurance agents'. Under the new arrangement, travel agencies and their staff must be registered with the Insurance Agents Registration Board before selling travel insurance to their customers. They are also required to pass the new 'Travel Insurance Agents Examination' of the Insurance Intermediaries Quality Assurance Scheme and receive continuous professional training.

In line with international supervisory principles and to keep pace with rapid development of the insurance market, the Government is preparing proposals on the setting up of an independent IA for consultation with stakeholders.

The IA has commissioned a consultancy study on the need and feasibility of establishing Policyholders' Protection Funds (PPFs) in Hong Kong, the first stage of which comprises a review of the existing regulatory framework and a feasibility study on establishing PPFs. The appointed consultant is preparing a comprehensive report to highlight the design features of different available options and the main concerns of stakeholders. The Government will determine the way forward taking into account findings and recommendations thereon.

The IA commissioned another consultancy study in September 2003 to examine the supervisory regime of the assets of long-term business insurers. This study focuses on an appropriate asset valuation framework and the need for a more robust mechanism to safeguard the interest of Hong Kong policyholders upon failures of long-term insurers. The first stage of the study includes a review of the existing supervisory regime as well as international practices. The Government will decide on whether to proceed further after examining the outcome and latest trend of international regulatory developments.

To facilitate mutual assistance and exchange of information, the IA concluded a memorandum of understanding separately with the Office of the Superintendent of Financial Institutions of Canada and the National Association of Insurance Commissioners of the United States in 2006.