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Legal Update

Government's Refinement of Proposed Insurance Regulatory Regime

29 June 2011
Mayer Brown JSM Legal Update

The Financial Services and Treasury Bureau published the "Proposed Establishment of an Independent Insurance Authority Consultation Conclusions and Detailed Proposals" ("Consultation Conclusions") and the relevant "Frequently Asked Questions" ("FAQs") on 24 June 2011. Whilst the proposed insurance regulatory framework, based on the existing framework for the securities and banking industries, is broadly the same as that set out in the consultation paper published in July 2010, we seek to highlight in this Legal Updates some of the Government's refinement of the proposed regulatory regime. For further information on the overall proposed regulatory framework, please refer to our Legal Updates dated 14 July 2010 entitled "The End of Self-Regulation? Proposals to Establish an Independent Insurance Authority".

Broad Additional Function of the IIA

In concluding that the proposed independent Insurance Authority ("IIA") should assume an expanded role beyond the functions of the existing Insurance Authority to align with the international standards, the Government proposed in the Consultation Conclusions that the function of the IIA should also include "to assist the Financial Secretary in maintaining the financial stability of Hong Kong by taking appropriate steps in relation to the insurance industry". Comparing with the originally proposed three additional functions of the IIA (namely, (a) to perform direct regulation on the conduct of insurance intermediaries; (b) to organise public education programmes; and (c) to conduct thematic researches and studies concerning the industry), this latest proposed function of the IIA is drafted more broadly and is therefore expected to facilitate the IIA in carrying out its duties, within the power granted, by giving it a broad legal basis.

3-Year Deemed Licensed Period For Pre-existing Insurance Intermediaries

Whilst a new licensing regime for insurance intermediaries will be introduced under the proposed regime, the Government proposed in the Consultation Conclusions that the pre-existing insurance intermediaries validly registered with the current three self-regulatory organisations (i.e. the Insurance Agents Registration Board, the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association) would be deemed to be licensed with the IIA for three years from the establishment of the IIA before obtaining their licences. The Government further proposed that the IIA may consider mandating the pre-existing intermediaries to submit their license applications within a fixed period upon the IIA's establishment if they wish to obtain licenses under the new regime.

Given that there are currently more than 70,000 insurance intermediaries, the proposed transitional arrangement would allow the IIA to have sufficient time to process the large volume of license applications from pre-existing insurance intermediaries in addition to those license applications made by new joiners to the industry. At the same time, the proposed 3-year transition period appears to be a reasonable time period for enabling the pre-existing insurance intermediaries to comply with any proposed eligibility requirements under the proposed licensing regime. To allay pre-existing intermediaries' concerns in relation to the transition to the proposed licensing regime, the Government clarified in the FAQs that the eligibility criteria under the proposed licensing regime would refer to the pre-existing registration conditions and that there was no intention to introduce any changes to the eligibility requirements through the legislative exercise to establish the IIA.

Restricted Power Delegation to HKMA

Whilst the Government's stance remained that the IIA should work closely with the Hong Kong Monetary Authority ("HKMA") in regulating the insurance intermediary activities of banks, the Government provided more details in the Consultation Conclusions in relation to the proposed demarcation of the regulatory roles assumed by the IIA and HKMA.

Inspection Power: The Government proposed that inspection of insurance intermediary activities of banks would be jointly carried out by the IIA and HKMA. Whilst this proposed arrangement may incur resources from both regulators, it would allow the IIA, as the primary and lead regulator, to have first-hand information to the insurance intermediary activities of banks for the purpose of making any sensible and prompt regulatory response in relation to the insurance intermediary activities of both banks and non-banks.

Investigation Power: The Government proposed that the investigation power with respect to alleged wrongdoings of bank's insurance intermediaries be generally delegated to the HKMA by the IIA subject to the IIA's decision to carry out any investigations itself, take over any investigations from the HKMA or send staff to participate in the investigation team of the HKMA. This proposal should send a clear message to the insurance intermediaries industry that the IIA is the ultimate regulator of insurance intermediaries in practice, whether or not they are bank related.

Disciplinary Power: The Government proposed that the decisions of whether to impose disciplinary sanctions on an insurance intermediary lie in the IIA whether or not the investigation is conducted by the HKMA. This proposal would ensure that all intermediaries are subject to the same disciplinary standards even if the HKMA may be involved in the inspection and investigation process.

Levy Cap on Non-life Insurance Policies

Whilst the Government maintained that one of the funding sources for the IIA would be a levy of 0.1% on insurance premiums for all insurance policies, it responded to the public request that a cap on such levy be imposed. In the Consultation Conclusions, the Government proposed to (a) cap the levy on non-life insurance policies with annual premiums at or above HKD 5 million and that on life insurance policies with single or annualised premiums at or above HKD 100,000; and (b) exempt reinsurance contracts from the levy. Such levy cap and exemption should alleviate concerns from the insurance industry that high premium policies may otherwise be driven offshore and that it would be unfair for the same insurance policy to be subject to double-levies due to reinsurance arrangement.


The Government's refinement of the proposed insurance regulatory regime set out in the Consultation Conclusions is welcome. In particular, the transitional arrangement for pre-existing insurance intermediaries appears to be sensible and that the restricted delegation of regulatory power to the HKMA appears to be a fair response to allay concerns from non-bank related insurance intermediaries.

The next step forward for the Government is to involve the insurance and banking industry and the relevant stakeholders in further refining the detailed proposals for the drafting of legislation by early 2012.

For inquiries related to this Legal Update, please contact:

Sara Or ( )

Cindy Sze ( )

Learn more about our Hong Kong office, Financial Services Regulatory & Enforcement and Insurance & Reinsurance practices.

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