Chief Delegate of Hong Kong Delegation to EAIC 2018

Hong kong Report

by

Mr P L Chan

Chief Delegate of Hong Kong Delegation to EAIC 2018

7 May 2018

Market Overview

Insurance is a vital pillar of Hong Kong’s financial service industry and a major economic sector employing more than 100,000 people, including close to 90,000 insurance agents and about 10,000 engaged in insurance brokerage business. As at February 2018, there are 160 authorized insurers in Hong Kong, of which 94 are pure general insurers, 47 are pure long-term insurers and the remaining 19 are composite insurers. Market data charts are attached at the end of this paper.

Regulatory Development

Establishment of the Insurance Authority (IA)

The Insurance Companies (Amendment) Ordinance 2015 was passed by the Legislative Council on 10 July 2015 which opened a new and important chapter of the Hong Kong insurance industry.

As the representative body of the insurance industry, the Hong Kong Federation of Insurers (HKFI) is glad to have played an instrumental role in this important project over the past few years and helped achieve a satisfactory outcome for the good of the industry and consumers.

With the Insurance Authority (IA) was officially set up on 26 June 2017, the issue of premium levy collection seemed to be even more pressing. In addition to conveying industry’s views and concerns to the IA, we have also arranged rounds of briefings and circulations to ensure Members have all the necessary information to comply with the legal requirements. At the same time, we also helped communicate the important message to policyholders, i.e. it is their legal obligation to pay such a levy.

While we continued our work on premium levy, we have also spent considerable efforts and resources on shaping the future direct licensing regime. We reviewed a raft of guidelines and codes on the regulation of insurance intermediaries, e.g. fit and proper criteria, continuing professional development programme, code of conduct, maximum number of appointing insurers, etc. Related consultations were conducted among Members to ensure the future regulatory framework is fit for purpose and will not suffocate the healthy development of the market.

One of the lingering issues was the regulated activities conducted by salaried staff of insurance companies. Based on the input from Members, the IA has prepared a draft FAQ for Members’ reference.

To facilitate future administration of intermediary registration, the IA plans to launch an electronic licensing portal. We are supportive of this environmental friendly initiative and have thus helped collect views from Members to ensure the portal is practical and user-friendly.

With the IA assuming all regulatory function by mid-2019, it is of great importance for the HKFI and IA to work out a “framework of collaboration” to delineate our respective roles and decide how to support and complement each other’s work. In this connection, we will engage IA for more in-depth discussion to help raise the industry’s standards and grow the market.

Policy Holders' Protection Scheme (PPS)

The IA and the Financial Services and the Treasury Bureau (FSTB) revived the discussion on PPS in late 2017. While our concerns over the General Insurance Scheme, e.g. unknown accumulation of risk due to offer of world-wide cover in personal insurance, coverage for SMEs, remained unresolved, the IA had proposed a new custodian trust approach for the Life Insurance Scheme.

The HKFI has thus organized briefings in early 2018 for Members to better understand the proposed frameworks and express concerns. The General Insurance and Life Insurance Councils of HKFI have also set up task forces respectively to look at the issues in greater depth and reflected our views to the IA.

As the FSTB plans to introduce the PPS Bill into the Legislative Council in the 2018-19 legislative year, in order not to delay the process, the Administration agreed to deal with the custodian requirement as a separate exercise from the PPS Bill.

Risk-based Capital (RBC) Framework for Hong Kong

The IA completed the First Quantitative Impact Study (“QIS 1”) by the end of 2017 for the Development of Risk-based Capital (“RBC”) Regime. Majority of our member companies have participated in the exercise.

HKFI provided our response to the IA in March 2018 to re-confirm our support to the RBC development while we expressed the industry’s concern that the first three points of the following four key principles were yet to be achieved, mostly because of the overly conservative approach to QIS 1:

To ensure that there is a fair balance between policyholder security and cost;

To maintain the competitiveness of Hong Kong as a financial centre;

To ensure consistency across similar products written under different licences; and

To gain and grant "equivalence" with other jurisdictions.

The IA has convened Industry Focus Group(IFG) meetings and targets to launch QIS 2 in July/August 2018,aiming to complete the exercise by H2-2018. At the same time, the IA is finalising the draft consultation paper on Pillar 2 on Enterprise Risk Management with target completion dateof early 2019. HKFI is closely liaising with the IA and our IFG representatives on with a view to maintaining the competitiveness of the insurance industry in Hong Kong.

International Financial Reporting Standard 17 (IFRS 17) – Insurance Contracts issued by International Accounting Standards Board (“IASB”)

On 18 May 2017, the IASB issued IFRS 17 which will bring about pervasive impact on the insurance industry. The industry expressedserious concern to the Hong Kong Institute of Certified Public Accountants(HKICPA) about the proposed implementation date of 1 January 2021:

albeit the effective date is 1 January 2021, Member Companies would have to get ready by January 2020 such that all accounting reporting and statistical returns for 2020 would be aligned with those for 2021; however, the new standards and templates and relevant software are yet to be available;

due to a limited pool of major consultancy firms and IT vendors, Members were facing challenges in the choice of appropriate firms providing the relevant consultancy services and at reasonable costs;

the tight timeline for implementing IFRS 17, coinciding with the concurrent implementation of impending requirements including IFRS 9 – Financial Instruments, Risk-based Capital Regime and Collection of IA’s Premium Levy, have consumed substantial actuarial, finance and IT resources of Members;

Hong Kong implementing IFRS 17 ahead of most, if not all, of the other regions while the international adoption timeline was still being subject to discussions among the International Accounting Standards Board, local accounting settings, regulators and insurers in various countries;

small local insurers had minimal awareness of IFRS 17 and limited resources in hiring staff of high caliber. It might lead to some SME insurers losing business opportunities in writing employees’ compensation insurance policies of multiple years.

HKFI has expanded the membership of the current Task Force and conveyed our views toHKICPA’s Hong Kong Insurance Implementation Support Group and to the regulator. To facilitate better understanding and preparation of our Life Insurance and General InsuranceMembers, we also organizedbriefings for the Members.

Business Development

Building an Insurance Claims Fraud Prevention Database (DB)

Experience from the overseas markets shows that an industry wide claims database can help strengthen insurance industry's collaborative capabilities in detecting, deterring and preventing fraudulent claims to protect the interests of honest consumers. In this connection, the setting up of a claims database has been chosen as a top priority project of the HKFI in the past few years.

With the support of Member Companies, the Project Team completed the proof of concept in June 2017 with encouraging results. Briefings and workshops were thus held for Members, Insurance Authority Chief Executive Officer and the Privacy Commissioner to showcase them the fraud detection capability of the DB and the data privacy protection framework.

A Steering Committee (STC) was set up in January 2018 to reassure the public that the construction of the DB fully adheres to the cardinal principle of data privacy by design and there is proper and effective governance structure on transparency, risks control and risks mitigation. The STC, chaired by Mr Edward Chan, SC, consists of prominent figures from a wide spectrum of professional fields – legal, data privacy, medical, technology, consumer protection, academic, etc.

With the STC officially in place, Members’ onboarding process has also been in full swing. A Provisional Executive Committee has been set up to facilitate the onboarding toolkit including the set of participation agreement, a code of practice and the operation manual. Onboarding meetings were also set up with individual companies to prepare for the launch of the DB by the end of 2018.

Insurance Ethics Management Training and Quality Education

To promote and organise quality insurance training, education to nurture talent and enhance the industry’s professionalism is one of the HKFI’s important missions. Our initial study points to the immediate need to step up ethics management training and standardise such training for all industry practitioners.

Our target is to launch face-to-face curriculum and extend to e-learning mode in the next phase. Brainstorming sessions were held to consult member companies and agency associations on case studies. With the curriculum and training materials in place, wewill solicit IA’s support toour initiative on prescribing this Ethics Training as core CPD subject for allinsurance agents.

At the same time, HKFI continues to support the Government’s Pilot Programme to Enhance Talent Training for the Insurance Sector - Financial Incentive Scheme for Professional Training. This year, we have partnered with more reputable educational institutes in rolling out training programmes for the industry. All programmes and courses were designed to meet the training needs of the industry and fill the prevailing gaps in the market. 350 participants have signed up for these courses from end-2017 to March 2018.

Voluntary Health Insurance Scheme (VHIS)

Our dialogue with the Food and Health Bureau (FHB) continued in the most constructive manner. We provided professional inputsand helped fine tune the Standard Plan Policy Template and the Code of Practice for Insurance Companies under the Ambit of VHIS.

In February 2018, the Financial Secretary (FS) of HKSAR had announced the tax incentive for VHIS in the Budget Speech for 2018/19. The FHB had also officially announced the introduction of VHIS on the following day. Once the relevant ordinance is passed by the Legislative Council, VHIS products will be officially launched on 1 April 2019 at the beginning of the new financial year.

Going forward, we will continue to facilitate the smooth implementation of VHIS and discuss the particular details of the proposed framework with the FHB. Another important step will be on public education of VHIS, in particular those relating to migration options and regulation of VHIS.

Tax Concessions for Premiums of Deferred Annuity Products and Mandatory Provident Fund (MPF)

In his budget speech for 2018/19, the FS of HKSAR introduced new tax incentives for annuity products and MPF voluntary contribution. The FS has taken into account the recommendations the HKFI have made in September 2017 on tax relief. We welcome the introduction of such tax incentives and believe that they will help raise public awareness of the role and function of annuity and attract higher take up rate.

The tax allowance for MPF voluntary contribution will incentivise our working population to top up their MPF account for retirement purposes and make good use of this occupational retirement savings vehicle.

Going forward, we have set up a special committee to provide all the necessary professional input and expert advice to help the IA and FSTB to work out an appropriate tax incentive scheme for the good of the Hong Kong community.

InsurTech

On the InsurTech front, we welcome IA’s introduction of the Insurtech Sandbox to facilitate a pilot run of innovative Insurtech applications. While individual insurers would make use of the sandbox approach, we at the HKFI has looked at InsurTech from an industry’ perspective.

In addition to establishing the Insurance Fraud Prevention Claims Database which employs state of the art algorithm in AI, we have also put in substantial resources to combat faked motor cover note through blockchain technology. When launched in the second half of 2018, it will be the first industry-wide blockchain application in Hong Kong.

Also being dealt with collectively at the industry level was Cloud Computing. Seeing that Members might have different challenges when applying to use cloud computing with the IA, we have engaged independent consultant to help come up with a framework to facilitate such application.

At the same time, the FinTech Task Force of HKFI’sLife Insurance Council has also tried to tackle InsurTech issues from various aspects, including streamlining the Financial Needs Analysis process through e-platform.

Hong Kong as IUMI’s Asia Huband Education in Marine Insurance

In October 2016, the International Union of Marine Insurance (IUMI) has set up its Asian hub in Hong Kong – its first permanent presence outside Europe in IUMI’s 142 year history.

As IUMI’s Asian Hub, the HKFI will help promote marine insurance in the region and conduct quality training/conferences to upgrade the industry’s professional standard. At the same time, the HKFI will help IUMI raise its profile in this part of the world and build a broader and stronger network.

Talent development is the key to the continued success of our industry. In March 2018, HKFI’s Marine Insurance Association(MIA) launched its first ever professional training programme. This 45-hour programme is unique in more ways than one – it is the first time we partner with HKU SPACE; the relevant subjects are recognised and accredited by ANZIIF; it is endorsed by the Financial Incentive Scheme under FSTB’s Pilot Programme to Enhance Talent Training for the Insurance Sector; each student who is insurance practitioner will be eligible to receive a subsidy of $6,000 from Government. And more importantly, the programme is fully supported and endorsed by the IUMI, the world’s leading marine insurance institution.
Insurance Data at a Glance

Number of Authorized Insurers in Hong Kong

Number of Registered Insurance Agents

Number of Authorized Insurance Brokers

Total Life Premiums for In-force Business

Number of Life Insurance Policies In-force

Non-life Insurance Business – Gross Premiums vs Underwriting Performance

Underwriting Performance of Direct Non-life Business

Underwriting Performance of Direct & Reinsurance Inward Non-life Business

Note: US$1 = HK$7.8

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