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Hong Kong: Offshore Business Sectors


Hong Kong offers an excellent environment for insurers and reinsurers amidst a global trend of convergence among financial services industries with its sophisticated capital markets and concentration of fund managers. Being a leading insurance centre in Asia, Hong Kong has attracted many of the world's top insurance companies. Hong Kong has the largest number of authorised insurance companies in Asia. The industry has also built up a critical mass of professionals.

Total gross premiums were HKD207.2bn (US$26.6bn) in 2010, representing an increase of 11.6% over the previous year, according to figures released in March 2011.

In the first quarter of 2011, total gross premiums were HKD56.3bn, representing an increase of 13.3% over the corresponding period in 2010. Meanwhile, gross and net premiums of general insurance business rose by 11.2% to HKD10.3bn and 8.4% to HKD7.0bn respectively compared with the corresponding period in 2010. Overall underwriting profit however declined from HKD559m to HKD482m.

As at March 31, 2011, there were 167 authorized insurers in Hong Kong, of which 102 were pure general insurers, 46 were pure long-term insurers and the remaining 19 were composite insurers. As of the same date there were 2,365 insurance agencies, 32,782 individual agents and 26,693 responsible officers/technical representatives registered with the Insurance Agents Registration Board (IARB).

There were 585 authorized insurance brokers as at March 31, 2011, and all of these are members of the two approved bodies of insurance brokers, namely The Hong Kong Confederation of Insurance Brokers and Professional Insurance Brokers Association. In addition, there were 8,160 persons registered as chief executives/technical representatives of these authorized brokers as at the same date.


Independent Insurance Authority Proposed

On June 24, 2011, the government announced detailed proposals on the proposed establishment of an independent Insurance Authority (IIA) aiming at enhancing regulation of insurance companies and insurance intermediaries to provide better protection for insurance policyholders and facilitating the stable development of the insurance industry. launched a three-month consultation on proposals for an independent insurance authority (IIA).

The Secretary for Financial Services and the Treasury, Professor K C Chan, said that the IIA would help reinforce Hong Kong's position as an international financial centre.

"The proposed setting up of the IIA would align with international practice for financial regulators to be independent, both operationally and financially, of the Government and the industry," Chan said. "The proposed IIA is also expected to be more nimble in responding to new regulatory challenges and facilitating market innovation, as well as maintaining the competitiveness of the industry without undermining regulation."

For more effective regulation of insurers and insurance intermediaries, the Government has proposed that the IIA would be provided with express powers to initiate investigations, search and seize materials upon the issue of a warrant, prosecute offences summarily and impose a range of regulatory sanctions in cases of misconduct. Further details are set out in the detailed proposals.

According to the government, many respondents in the public consultation exercise which informed the new proposals expressed support for the direct regulation of insurance intermediaries by the IIA.

Under the enhanced proposals, the IIA would hold a direct regulatory role over the conduct of insurance intermediaries through introducing a licensing regime. To facilitate a smooth transition and minimise the impact on pre-existing insurance intermediaries, the Government proposes that those who are validly registered with the self-regulated organisations (SROs) should be deemed to be licensed with the IIA for three years upon its establishment, so that they can carry on their business while applying for licences from the IIA.

While the professional standards for insurance intermediaries are subject to regular reviews in light of local and international insurance market developments and consumer expectations, there is no intention to introduce any changes to the eligibility requirements through the legislative exercise to establish the IIA.

The proposals for the regulation of the insurance intermediary activities of banks have also been enhanced, in consideration of comments from the insurance and banking industries. To ensure consistent regulation, the IIA would be the primary and lead regulator for all insurance intermediaries, irrespective of whether or not they are banks and their employees, and the sole authority to stipulate conduct standards and regulatory requirements. In this regard, the government proposes that the IIA should be able to delegate to the Hong Kong Monetary Authority (HKMA) specified powers to perform certain front-line regulatory functions. These powers and the delegation procedures would be stipulated in the statute to enhance transparency and accountability. The HKMA would be accountable to the IIA in exercising such delegated powers. Disciplinary powers would be vested with the IIA and the HKMA would participate actively in the disciplinary process to ensure consistency.

To enhance the accountability of the IIA in the exercise of powers, the government has also enhanced the proposal for establishing an independent Insurance Appeals Tribunal to handle appeals by insurers and insurance intermediaries against relevant regulatory decisions. The proposed statutory tribunal would operate on a full-time basis and be chaired by a person who is eligible for appointment as a judge of the High Court, and would include a number of market practitioners and others with relevant knowledge and experience of the insurance industry.

The government proposed in the 2010 consultation document that the IIA would fully recover its operational costs in the sixth year of its operation, and the government would provide a HKD500m lump sum subsidy. In the light of the consultation responses and given the current portfolio of large premium policies held by insurers, the government proposes to cap the market levy on non-life insurance policies with annual premiums at or above HKD5m, and life insurance policies with single or annualised premiums at or above HKD100,000. The government also proposes to exempt re-insurance contracts from levying. These measures, the government said "would sustain the competitiveness of our insurance industry".

Key legislative provisions with respect to the formation of the IIA will be released in draft form in early 2012 for further public consultation.


Market Liberalization

Taking advantage of a more liberal regional insurance market after the 1990s financial crisis in Asia, many foreign insurers and reinsurers have positioned to expand their market share in the region. The accession of China to the WTO has accelerated the process, as has the Closer Economic Partership Arrangement (CEPA) between Hong Kong and China. A number of foreign insurers and reinsurers have announced plans to expand their regional operations in Hong Kong to cater for the development of the regional insurance market (as well as the MPF market in Hong Kong). Mainland affiliated companies are also linking up with foreign insurers in Hong Kong to cater for the mainland business.

A large number of insurers are incorporated overseas, and most of these are in the general business sector. Among the overseas incorporated insurers, the US and the UK hold the lead. Big players have a dominant presence in the market. The top 10 insurers take more than one third of the general insurance market, and the top 10 long term insurers have more than 80% of the long term insurance market.

Short-term prospects for the insurance industry are enhanced by the sharp recovery of regional economic activities and the launching of the Mandatory Provident Fund (MPF) scheme (which began collecting contributions in December 2000). The MPF scheme will, it is estimated, inject an extra of US$4-5 billion a year of retirement funds for the next 30 or so years until the system matures. Insurance companies will play a vital role in not just administering the MPF, but also operating master trusts and directing funds to various external fund managers.


Captive Insurance

Hong Kong is relatively new to the concept of captive insurers - companies set up so that the parent company can insure its own risk, keeping the insurance premiums within the group structure - but the Office of the Commissioner of Insurance has been actively promoting Hong Kong as an excellent environment for captives from mainland China, citing a well-developed infrastructure, advanced telecommunications, the rule of law, independent judicial power and an efficient workforce.

With the enactment of the Insurance Companies (Amendment) Ordinance 1997 on May 1 1997, concessions are well in place in the territory's regulatory framework to provide incentives for multinational conglomerates to establish their captive insurers in the SAR. These include a minimum capital requirement of HKD2m (as opposed to HKD10m for a general business insurer) and an annual and authorization fee of HKD22,600 - one-tenth of the fee chargeable to other authorized insurers in Hong Kong. Captive insurers are also exempt from the requirement to maintain assets in Hong Kong, and the solvency margin requirement is set at 5% of net premium income (or 5% of net claims outstanding) whereas it is generally 20% of the relevant premium income for a general business insurer.



Profit tax is 16.5% (2010/11). A tax rate at 50% of the normal profits tax rate applies tooffshore business of professional reinsurance companies. Life insurance businesses are assessed at 5% of the value of the premiums arising in Hong Kong.



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