Authorisation of Insurers in Hong Kong

Transcription

1 Authorisation of Insurers in Hong Kong

2 Further information If you would like further information on any aspect of authorisation of insurers in Hong Kong please contact a person mentioned below or the person with whom you usually deal. Contact Tim Fletcher Partner T E tim.fletcher@lovells.com Simon Yu Consultant T E simon.yu@lovells.com January 2009 This note is written as a general guide only. It should not be relied upon as a substitute for specific legal advice.

3 Contents 1. Overview of the Hong Kong Insurance Market 1 2. Regional Insurance Centre 1 3. Hong Kong Regulatory Framework 1 4. Local vs Overseas Insurers 2 5. Authorisation Requirements at a Glance 2 6. Application Procedure and Fees Payable 3 7. Post-Authorisation Requirements 4 Table 1 Classes of Long Term Business 5 Table 2 Classes of General Business 6 Table 3 Statutory minimum paid-up share capital and solvency margin requirements 8 Table 4 Indicative timing and procedure for application for authorisation of insurers 9

4 Lovells Authorisation of Insurers in Hong Kong 1 1. OVERVIEW OF THE HONG KONG INSURANCE MARKET Hong Kong has the second most developed insurance market in the Asia region after Japan in terms of per capita insurance premium. Hong Kong has attracted many of the world s top insurance companies and operates as a regional insurance centre for Asia. As at 30 September 2008, 174 insurers (approimately 63% general business insurers, 26% long term business (or life) insurers and 11% composite insurers) were authorised in Hong Kong. Of these insurers, 90 were companies incorporated in Hong Kong while 84 are international companies coming from 23 different countries, with the US, the UK and Bermuda being the largest home jurisdictions. 2. REGIONAL INSURANCE CENTRE Many locally incorporated insurance companies are subsidiaries of international insurers. Hong Kong operates a non-discrimination policy between an insurer established as a locally incorporated company and the branch of an overseas insurance company although the trend is towards local establishment. Taking advantage of more open regional insurance markets, many foreign insurers and reinsurers have epanded their operations in the region. China s accession to the World Trade Organisation ("WTO") has also accelerated the process and is a focus for development of many international insurers. In addition to Mainland China s WTO liberalisation measures, Hong Kong s insurance sector and professionals can benefit from the Mainland and Hong Kong Closer Economic Partnership Arrangement ("CEPA") signed with Mainland China in relation to the development of insurance business in China. Since the operation of CEPA with effect from 1 January 2004, Hong Kong insurers and individual industry practitioners are permitted to engage in business in Mainland China on advantageous terms of access subject to fulfilment of certain conditions. Further liberalisation measures in the insurance sector came into operation as from 1 January 2008 which facilitate Hong Kong residents to obtain insurance intermediaries qualifications in Mainland China and Hong Kong insurance agency companies to provide agency services in Mainland China. 3. HONG KONG REGULATORY FRAMEWORK The legal framework for the regulation of insurers is provided by the Insurance Companies Ordinance (Cap.41) and its subsidiary legislations. The Office of the Commissioner of Insurance ("OCI") is the regulatory body which administers the Insurance Companies Ordinance. The OCI is headed by the Commissioner of Insurance who, in his role as the Insurance Authority, is responsible for the regulation and supervision of the insurance industry in Hong Kong. Generally, any company intending to carry on insurance business in or from Hong Kong must obtain authorisation from the Insurance Authority. Only a company incorporated in Hong Kong or registered under Part XI of the Companies Ordinance (Cap. 32) as a branch of an overseas company (or Lloyd s) can be authorised for the conduct of insurance business in Hong Kong. An insurer may be authorised to carry on all or some of the long term insurance business and/or general business specified under Schedule 1 to the Insurance Companies Ordinance. Tables 1 and 2 set out the classes of long term business and general business respectively. The reinsurance sector is not separately regulated. Although the Insurance Companies Ordinance contemplates authorisation of a composite insurer, the Insurance Authority now has a policy against approving new applications for a composite licence. Ecept for a professional reinsurer, an application for authorisation must be for either general business or long term business, but not both. A composite insurer will need to form separate companies for general and life business in establishing a business in Hong Kong. There are specific regulations for Lloyd s related insurers which are not considered in this note. The main statutory authorisation criteria prescribe the minimum requirements on paid-up capital, solvency margin, fitness of directors and controllers and adequacy of reinsurance arrangements among other matters. The statutory minima are unlikely to be sufficient to obtain authorisation which is a discretionary power of the Insurance Authority. The OCI have published guidance on how the Insurance Authority approaches the eercise of his power to grant authorisation of insurers which provides a helpful framework. However, the Insurance Authority also applies unpublished criteria on capital and solvency requirements which to some etent are fleibly applied. Additional requirements that the Insurance Authority will take into account when considering whether to authorise an insurer are specified in the OCI s Guidance Note ("GN5") and Authorisation Guidelines ("Guidelines") available on the OCI s website These requirements include mainly the need

5 Lovells Authorisation of Insurers in Hong Kong 2 for proper and independent management, a viable business plan and an appropriate physical presence in Hong Kong. Regard should also be had to the Guidance Note on the Corporate Governance of Authorised Insurers ("GN10"). Together, the Insurance Companies Ordinacne, GN5, GN10 and the Guidelines provide a high level framework of criteria that need to be met or addressed. The Insurance Authority has substantial discretions and prefers to consider applications "on individual merit". 4. LOCAL VS OVERSEAS INSURERS As Hong Kong adopts a free market economy, there is no difference in the authorisation requirements between an overseas insurer and a local insurer. Any insurer, whether local or overseas, which is able to meet the authorisation criteria, may apply for authorisation to carry on insurance business in Hong Kong. The Insurance Authority does not impose any citizenship requirement on insurers, or citizenship or local residence requirements on their directors. Appointment of a chief eecutive based in Hong Kong is however required. An overseas insurer can obtain authorisation to carry on business in Hong Kong in the form of a branch office (i.e. registered as a non-hong Kong company under Part XI of the Companies Ordinance (Cap. 32)). If the overseas insurer so desires, it can set up a local subsidiary company for this purpose. An insurer is allowed to have functions supported from outside Hong Kong to a degree but the Insurance Authority does not approve fronting operations or service company arrangements. An authorised insurer must be able to carry out key functions in Hong Kong through its own staff. 5. AUTHORISATION REQUIREMENTS AT A GLANCE 5.1. Capital and solvency margin requirements The applicant must have a minimum paid-up capital. However, the Insurance Authority will normally require a higher level of capital, appropriate to the business scale of the applicant. The applicant must also maintain an ecess of assets over liabilities (i.e. solvency margin) of not less than a required solvency margin. The Insurance Authority will require an appropriate safety margin on top of the minimum solvency margin. The statutory minimum requirements for paid-up share capital and solvency margin are set out in Table Fitness and propriety of directors and controllers The Insurance Authority must be satisfied that the directors and controllers of the applicant are fit and proper to hold such positions in the applicant. According to GN5, a controller includes the following individuals/bodies corporate: the managing director of the applicant or its holding company; the chief eecutive of the applicant and of its holding company which is also an insurer; the chief eecutive of the applicant responsible for the whole of the Hong Kong operation (in the case of a company incorporated outside Hong Kong); the holding company (including intermediate holding companies) of the applicant; and any person controlling 15% or more of the voting power of the applicant or its holding companies (including intermediate holding companies). In practice the Insurance Authority s focus is more on the managing director, chief eecutive and the direct holding companies of the applicant. The OCI have issued a guidance note which sets out their interpretation of the term "fit and proper". In considering whether a person is fit and proper, the Insurance Authority will take into account all relevant factors, including the integrity, reliability, financial status, relevant qualifications or eperience and ability to perform the relevant functions efficiently, honestly and fairly Adequacy of reinsurance arrangements An insurer is required under the Insurance Companies Ordinance to have adequate reinsurance arrangements in force for the risks of each class of insurance business it carries on, unless it is justifiable not to make such arrangements for that purpose. In considering the adequacy of the reinsurance arrangements of an insurer, the Insurance Authority will take into account factors including the type of treaties, the maimum retention of the insurer, the security of the reinsurers and the spread of risks among participating reinsurers. In addition, the OCI have issued a "Guidance Note on Reinsurance with Related Companies" to assist in clarifying how reinsurance arrangements with related companies will be considered adequate.

6 Lovells Authorisation of Insurers in Hong Kong Separation of assets and liabilities (for long term business insurers only) A long term business insurer will have to comply with the requirement of the separation of assets and liabilities attributable to its long term business and ensure that not less than onesith of the required solvency margin is held in the long term business funds Local asset requirement (for general business insurers only) With the eception of professional reinsurers and captive insurers, an insurer carrying on general insurance business is required to maintain assets in Hong Kong of an amount which is not less than the aggregate of 80% of its net liabilities and the solvency margin applicable to its Hong Kong general insurance business Other relevant criteria (not ehaustive) The applicant will maintain an office as its place of business in Hong Kong, with a professional management and staff establishment appropriate to the nature and scale of its operations and a locally-based chief eecutive to oversee its Hong Kong operation. The applicant s board of directors has sufficient knowledge and relevant eperience of insurance business to guide the company and oversee its activities effectively (sufficiency would normally mean at least one-third of the board has such knowledge and eperience). The applicant has to submit an organisational chart showing the proposed staff establishment with particulars of the qualifications and eperiences of those at managerial level to assist the Insurance Authority in his assessment on the competence of the applicant s management team. Ecept for captive insurers, a general business insurer has to submit a three-year business plan consisting of a budgeted revenue account, a budgeted profit and loss account and a budgeted balance sheet for each of the three years whereas a long term business insurer is required to prepare a business plan with financial projections covering more than three projected years up to where operations can be demonstrated to be selfsupporting. The OCI attach importance to these business plans which an insurer is epected to follow on authorisation. With the eception of captive insurers, the applicant has undertaken a detailed market feasibility study in respect of its proposed operations in Hong Kong and is able to demonstrate the viability of its business plan. The applicant has, and will continue to have, sufficient financial resources to prefinance its operation set out in its business plan. An applicant which was incorporated outside Hong Kong must satisfy the Insurance Authority that it was incorporated in a country with comprehensive companies law and insurance law, that it is an insurer under effective supervision by insurance regulatory authorities of its home country and that it is a well established insurer with international eperience and of undoubted financial standing. For an insurer carrying on long term insurance business, the applicant must have sufficient actuarial epertise, including a qualified staff actuary, to advise it on various matters relating to its long term business. The application shall be accompanied by a report and certificate from a qualified actuary, acceptable to the Insurance Authority, affirming the appropriateness or otherwise of the business plan according to prudent actuarial principles and stating whether in his opinion prudent and satisfactory arrangements governing actuarial matters have been made. Where the applicant proposes to carry on investment-linked type of long term business, there should be adequate accounting procedures to enable assets and liabilities to be identified and properly valued and timely reports to be furnished to the policy holders and that the applicant has available sufficient investment management epertise to manage the invested funds. 6. APPLICATION PROCEDURE AND FEES PAYABLE Application for authorisation must be made in specified forms. To facilitate the processing of an application for authorisation, a formal application is usually preceded by informal discussions with the Insurance Authority and submission of a draft application for pre-vetting. An outline of the application procedure is summarised in Table 4. An applicant does not need to comply with all the authorisation requirements, including those on capital and staffing plans, before submitting an application for authorisation. These can be done

7 Lovells Authorisation of Insurers in Hong Kong 4 after the applicant has obtained approval in principle for authorisation from the Insurance Authority taking into account the Insurance Authority s comments. Formal authorisation will be given after the Insurance Authority has been satisfied that the applicant has complied with all authorisation requirements. Depending on the adequacy of the information supplied by an applicant and its promptness to respond to the Insurance Authority s enquiries, the whole process from the submission of the draft application to the issue of a letter of approval-in-principle may be concluded within four to si months although a longer period is realistic. After the issuance of the approval-inprinciple, the Insurance Authority will conduct a site inspection to the applicant s proposed place of business. The Certificate of Authorisation confirming the formal authorisation can normally be issued within two weeks of the site inspection. As appropriate, the Insurance Authority may impose conditions on the authorisation and such conditions will be set out in the Certificate of Authorisation. No fee is payable on submission of an application for authorisation. Payment of an annual fee is required only on authorisation and on subsequent anniversary date of authorisation. The annual fee currently payable is HK$227,300 in respect of long term or general business and HK$22,600 in respect of general business carried on by a captive insurer. 7. POST-AUTHORISATION REQUIREMENTS Following authorisation, an insurer will be required continuously to meet the requirements for authorisation and is subject to ongoing requirements such as filing periodic returns to the OCI. However, the regulatory regime is relatively light and unintrusive. There is the possibility of regulatory change arising out of the 2008 global finance crisis but no specific initiatives regarding the insurance sector have been announced so far. Certain "insurance products" such as insurance-linked investment schemes and mandatory provident fund schemes involve regulation by other Hong Kong regulators, such as the Securities and Futures Commission and the Mandatory Provident Fund Schemes Authority, before being offered to the public in Hong Kong. Lovells January 2009

8 Lovells Authorisation of Insurers in Hong Kong 5 Class Description Nature of business A Life and annuity Effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life, but ecluding (in each case) contracts within class C below. B Marriage and birth Effecting and carrying out contracts of insurance to provide a sum on marriage or on the birth of a child, being contracts epressed to be in effect for a period of more than 1 year. C Linked long term Effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life where the benefits are wholly or partly to be determined by reference to the value of, or the income from, property of any description (whether or not specified in the contracts) or by reference to fluctuations in, or in an inde of, the value of property of any description (whether or not so specified). D Permanent health Effecting and carrying out contracts of insurance providing specified benefits against risks of persons becoming incapacitated in consequence of sustaining injury as a result of an accident or of an accident of a specified class or of sickness or infirmity, being contracts that- (a) are epressed to be in effect for a period of not less than 5 years, or until the normal retirement age for the persons concerned, or without limit of time, and E Tontines Effecting and carrying out tontines. either are not epressed to be terminable by the insurer, or are epressed to be so terminable only in special circumstances mentioned in the contract. F Capital redemption Effecting and carrying out capital redemption contracts. G H I Retirement scheme management category I Retirement scheme management category II Retirement scheme management category III Table 1: Classes of Long Term Business Effecting and carrying out contracts- (a) under which contributions (or premiums) are paid to, and become the property of, one party to the contract in return for the provision by that party of assets to be applied, whether directly or indirectly, towards the provision of benefits under a retirement scheme; and which provide for a guaranteed capital or return. Effecting and carrying out contracts- (a) under which contributions (or premiums) are paid to, and become the property of, one party to the contract in return for the provision by that party of assets to be applied, whether directly or indirectly, towards the provision of benefits under a retirement scheme; and which do not provide for a guaranteed capital or return. Effecting and carrying out contracts of insurance to provide, whether directly or indirectly, benefits under retirement schemes but ecluding- (a) contracts within class G or H above deemed under section 3(2) to be contracts of insurance; contracts within class 1 or 2 referred to in Table 2 below.

9 Lovells Authorisation of Insurers in Hong Kong 6 Class Description Nature of business 1 Accident Effecting and carrying out contracts of insurance providing fied pecuniary benefits or benefits in the nature of indemnity (or a combination of both) against risks of the persons insured - (a) (c) sustaining injury as the result of an accident or of an accident of a specified class, or dying as the result of an accident or of an accident of a specified class, or becoming incapacitated in consequence of disease or of disease of a specified class, inclusive of contracts relating to industrial injury and occupational disease but eclusive of contracts falling within class 2 below or class D referred to in Table 1 above. 2 Sickness Effecting and carrying out contracts of insurance providing fied pecuniary benefits or benefits in the nature of indemnity (or a combination of the two) against risks of loss to the persons insured attributable to sickness or infirmity, but eclusive of contracts falling within class D referred to in Table 1 above. 3 Land vehicles Effecting and carrying out contracts of insurance against loss of or damage to vehicles used on land, including motor vehicles but ecluding railway rolling stock. 4 Railway rolling stock Effecting and carrying out contracts of insurance against loss of or damage to railway rolling stock. 5 Aircraft Effecting and carrying out contracts of insurance upon aircraft or upon the machinery, tackle, furniture or equipment of aircraft. 6 Ships Effecting and carrying out contracts of insurance upon vessels used on the sea or on inland water, or upon the machinery, tackle, furniture or equipment of such vessels. 7 Goods in transit Effecting and carrying out contracts of insurance against loss of or damage to merchandise, baggage and all other goods in transit, irrespective of the form of transport. 8 Fire and natural forces Effecting and carrying out contracts of insurance against loss of or damage to property (other than property to which classes 3 to 7 above relate) due to fire, eplosion, storm, natural forces other than storm, nuclear energy or land subsidence. 9 Damage to property Effecting and carrying out contracts of insurance against loss of or damage to property other than property to which classes 3 to 7 above relate) due to hail or frost or to any event (such as theft) other than those mentioned in class 8 above. 10 Motor vehicle liability Effecting and carrying out contracts of insurance against damage arising out of or in connection with the use of motor vehicles on land, including third-party risks and carrier s liability. Table 2: Classes of General Business

10 Lovells Authorisation of Insurers in Hong Kong 7 11 Aircraft liability Effecting and carrying out contracts of insurance against damage arising out of or in connection with the use of aircraft, including third-party risks and carrier s liability. 12 Liability for ships Effecting and carrying out contracts of insurance against damage arising out of or in connection with the use of vessels on the sea or on inland water, including third-party risks and carrier s liability. 13 General liability Effecting and carrying out contracts of insurance against risks of the persons insured incurring liabilities to third parties, the risks in question not being risks to which class 10, 11 or 12 above relates. 14 Credit Effecting and carrying out contracts of insurance against risks of loss to the persons insured arising from the insolvency of debtors of theirs or from the failure (otherwise than through insolvency) of debtors of theirs to pay their debts when due. 15 Suretyship Effecting and carrying out- (a) contracts of insurance against risks of loss to the persons insured arising from their having to perform contracts of guarantee entered into by them; contracts for fidelity bonds, performance bonds, administration bonds, bail bonds or customs bonds or similar contracts of guarantee. 16 Miscellaneous financial loss Effecting and carrying out contracts of insurance against any of the following risks, namely- (a) (c) risks of loss to the persons insured attributable to interruptions of the carrying on of business carried on by them or to reduction of the scope of business so carried on; risks of loss to the persons insured attributable to their incurring unforeseen epense; risks neither falling within paragraph (a) or above nor being of a kind such that the carrying on of the business of effecting and carrying out contracts of insurance against them constitutes the carrying on of insurance business of some other class. 17 Legal epenses Effecting and carrying out contracts of insurance against risks of loss to the persons insured attributable to their incurring legal epenses (including costs of litigation). Table 2: Classes of General Business (continued)

11 Lovells Authorisation of Insurers in Hong Kong 8 Minimum Amounts of Paid-up Capital and Solvency Margin Type of Insurance Business Minimum Paid-up Capital (HK$ million) Minimum Solvency Margin (HK$ million) General Without Statutory Business* With Statutory Business Long Term 10 2 Pure Reinsurance (General business only) Pure Reinsurance (Long Term business only) 10 2 Pure Reinsurance (Composite business) Captive 2 2 Table 3: Statutory minimum paid-up share capital and solvency margin requirements.** Notes * Statutory business refers to any class of insurance business (not being reinsurance business) relating to liabilities or risks in respect of which persons are required by any Ordinance to be insured, including employees compensation insurance and third party bodily injury insurance in respect of motor vehicles and local vessels. ** The Insurance Authority will normally require a higher level of share capital and solvency margin.

12 Lovells Authorisation of Insurers in Hong Kong 9 Indicative Timing Procedure -- Preliminary meeting with the Insurance Authority -- Prepare and submit the draft application and response to the Insurance Authority s queries Normally within 2 months after submission of draft application (subject to sufficiency of information provided) Outcome of initial assessment by the Insurance Authority on the draft application -- Prepare and submit the formal application on positive assessment from the Insurance Authority Normally within 6 weeks of receipt of the formal application (subject to sufficiency of information provided) Approval in principle from the Insurance Authority -- Full compliance by the applicant of the conditions for formal authorisation When all preparations necessary to commence business are in place Normally within 2 weeks of site inspection On authorisation and on subsequent anniversary date of authorisation On-site inspection by the Insurance Authority of the applicant s business premises Formal authorisation from the Insurance Authority by issuing a Certificate of Authorisation Payment of relevant annual fees Table 4: Indicative timing and procedure for application for authorisation of insurers

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