Important implications for the Hong Kong insurance industry as well as non-insurance entities collaborating with insurers arise from the latest explanatory note (Explanatory Note) issued by the Insurance Authority (IA) in October 2021 defining whether someone is carrying on a ‘regulated activity’ under Section 64G of the Insurance Ordinance Cap 41 (IO) and therefore needs to be a licensed insurance intermediary.
What Amounts to a “Regulated Activity”?
Under Section 64G of the IO, it is a criminal offence for anyone to carry on or ‘hold out’ that they are carrying on a regulated activity in the course of their business or employment, or for reward, without an insurance agent or broker licence. Regulated activity is broadly defined as: negotiating or arranging a contract of insurance; inviting or inducing someone to enter into, or make a material decision on a contract of insurance; and giving regulated advice.
The latest Explanatory Note gives further insight on how the IA views regulated activity, as well as the prohibition under Section 64G of the IO:
- “Negotiating or arranging a contract of insurance”: “Negotiating” involves the process of agreeing, or attempting to agree, the terms and conditions of a contract of insurance. On the other hand, “arranging” is wider in scope, including activities that would bring the contract of insurance into effect; for example, if someone actively assists a customer to apply for insurance and passes the application to the insurer.
- “Inviting or inducing”: This requires an element of encouraging, persuading or convincing someone to enter into a contract of insurance, or make a material decision, which can be distinguished from merely providing information. By way of example, the IA considers that merely leaving insurance product pamphlets in a waiting room is not “inviting or inducing”. But encouraging or recommending customers to purchase insurance products does amount to “inviting or inducing” and needs to be licensed.
- “Material decision”, “regulated advice”: A material decision includes making an insurance application; issuing, renewing or terminating a contract of insurance; exercising any rights under a contract of insurance; and making or settling an insurance claim. Whereas regulated advice refers to an opinion about an insurance matter. This depends on a number of factors, including whether the decision or advice relates to a particular contract of insurance, and whether the person making the decision or receiving the advice is acting in the capacity of a policyholder.
- “Holding out”: A person is also prohibited from “holding out” carrying on a regulated activity without a licence. Somebody representing that they can provide insurance advisory services in promoting their non-insurance business is “holding out”.
- “In the course of the person’s business or employment, or for reward”: Generally, ‘in the course of business’ is defined as activity for a commercial purpose with a financial benefit. However, a financial benefit is not necessary. For instance, a person could be offering insurance advisory services for free, incidental to his core non-insurance services.
Related to Section 64G of the IO is Section 64N which prohibits insurers from entering into a contract of insurance through, or accepting referral business from, anyone in Hong Kong other than a licensed insurance intermediary.
To illustrate how this may apply in practice, the Explanatory Note sets out a few case studies.
Use of a Non-insurance Entity’s Website or App to Provide Insurance Services
This case study sets out a hypothetical scenario where an insurer collaborates with a non-insurance entity by using its website or app. If the non-insurance entity is not licensed, it will need to be mindful to have clear segregation between its non-insurance activities and the regulated activities of the insurer.
If the website or app allows the customer to purchase insurance products, the presentation must be clear that it is the insurer who is inviting or inducing customers to purchase insurance – and only using the website or app as a “shop window”. The non-insurance entity must not be involved in arranging the contract of insurance and must not submit any insurance applications or claims on behalf of the customer or receive premium.
The narratives and descriptions on the website or app must not give the customer any impression that the non-insurance entity is involved in offering insurance. For instance, slogans such as “in partnership with Insurer X, we bring you this offer” will amount to the non-insurance entity “holding out” that it is carrying on a regulated activity.
Remuneration will be another factor the IA will consider. A flat fee remuneration is less likely to suggest regulated activities, as opposed to remuneration tied to premium or number of insurance products sold.
Further, if the non-insurance entity is a financial services provider (e.g., bank), it needs to be extra cautious about offering insurance products via its website or app and should consider obtaining a licence.
Insurance is part of financial services and it is the IA’s view that customers will reasonably assume it is the financial services provider offering insurance services, even if there are relevant disclaimers.
Non-insurance Entity Seeks to Include Insurance-related Services as Incidental Part of Its Non-insurance Services
In this case study, the non-insurance entity may offer customers assistance to purchase insurance products by referring them to a licensed insurance intermediary. Common examples include property managers, estate agents, and car dealers.
As the non-insurance entity is not licensed, it must not give any regulated advice. This means it must not give customers advice about their insurance needs or recommend any particular insurance products. It is, however, not prohibited from giving a general opinion. such as advising a customer to consider purchasing property insurance for his flat.
In a nutshell, the non-insurance entity must not be involved in arranging the contract of insurance and must not collect any premium. It must therefore be careful not to make any representations in its marketing materials that it provides insurance-related services or has insurance expertise.
If the non-insurance entity refers customers to a licensed insurance intermediary, the intermediary must make the required disclosures under section 5.5 of the Code of Conduct for Licensed Insurance Agents or Code of Conduct for Licensed Insurance Brokers.
Price Comparison or Aggregator Websites
These websites allow customers to input information and compare prices and coverage of various insurance products. At face value, it may appear that the website is ‘holding out’ that it is carrying on regulated activity. However there could be a limited exception if the website makes clear that it is not carrying on any regulated activity – as just a search engine, not providing any recommendations or product evaluation.
But if the website does indicate which insurance products are “best buys”, this will be seen as “inviting or inducing” as it is encouraging customers to purchase a certain insurance product.
Referral Schemes for Customers
This case study relates to Section 64N of the IO. Insurer wishing to have a referral scheme whereby customers receive gratuity for referring their friends or relatives need to be mindful not to give any “reward” that may be seen as motivating customers to carry on regulated activities.
This will depend on the nature, amount and value of the reward. A small gratuity given as a token of appreciation will less likely contravene Section 64N of the IO, compared with a larger financial reward.
Conditions for receiving the gratuity will also be relevant. If the customer receives the gratuity merely by referring his friends or relatives to the insurer, the IA considers this to be less likely motivating the customer to carry on regulated activities, as opposed to receiving the reward only if the friend or relative purchases an insurance policy.
Sections 64G and 64N of the IO have important implications for the insurance industry as well as non-insurance entities collaborating with insurers. The Explanatory Note assists to give insight on how the IA would view and consider these issues in practice.
It is important for non-insurance entities to carefully review their arrangements with insurers and insurance intermediaries to ensure they are not in breach of the IO, particularly if they are offering insurance-related services as incidental part of their own services.
Non-insurance entities should also review and assess their communications to ensure they do not make representations that amount to ‘holding out’ they are carrying on regulated activities.
For both insurers and insurance intermediaries, it is also important to continuously assess and review collaboration with non-insurance entities and ensure there is clear segregation between regulated activities and non-insurance activities.