1. Insights – Legal page
82 Asia Insurance Review December 2016
O
n 7 October 2016, a revised
Guidance Note on the Corpo-
rate Governance of Authorized
Insurers (Revised GN10) was issued
by the Office of the Commissioner of
Insurance (OCI). The Revised GN10
replaces the Guidance Note on the Cor-
porate Governance Code for Authorized
Insurers (GN10) which came into effect
on 1 September 2003.
It sets out the minimum standards
of corporate governance that the OCI
expects of insurers authorised to carry
on insurance business in and from
Hong Kong, including the composi-
tion, role and responsibilities of the
board; internal controls; and compli-
ance with laws and regulations.
Revised GN10 will generally be-
come effective on 1 January 2017.
There is a one-year transitional period
for the increased minimum number
of independent non-executive directors (INEDs), remuneration require-
ments and establishment of a risk committee. The requirements relating
to “key persons in control functions” (Key Persons), a concept familiar in
other jurisdictions and to be introduced in Hong Kong under the Insur-
ance Companies (Amendment) Ordinance (Amendment Ordinance) will
necessarily not take effect until the relevant statutory provisions have
commenced.
Revised GN10 largely reflects the International Association of Insurance
Supervisors’ (IAIS) Insurance Core Principles 7 and 8 on corporate governance
and internal control systems and risk management frameworks, respectively.
Who does it apply to?
The OCI has expanded the range of insurers which must comply with Revised
GN10. Broadly, this captures all Hong Kong-incorporated insurers authorised
to carry on insurance business in and from Hong Kong other than those in
run-off. The run-off exemption applies to long term insurers that have ceased
new business and whose renewal business annual gross premium income is
less than HK$20 million (US$2.5 million) and all general insurers that have
ceased new and renewal business.
The Office of the Commissioner of
Insurance (OCI) has updated the
2002 Guidance Note on Corporate
Governance for Authorized
Insurers (GN10). Ms Joyce Chan
and Ms Gillian Morrissey of
Clyde & Co explain the key
changes.
Ms Joyce Chan Ms Gillian Morrissey
Hong Kong:
Key changes to
the Guidance
Note on Corporate
Governance
for Authorized
Insurers
Highlights
• Revised GN10 will generally
become effective on 1 January
2017. There is a one-year
transitional period for the
increased minimum number
of independent non-executive
directors, remuneration
requirements and establishment
of a risk committee;
• Revised GN10 largely reflects
the International Association of
Insurance Supervisors’ Insurance
Core Principles 7 and 8; and
• The regulator’s prior consent
for the appointment of senior
executives who carry out “control
functions” of insurers (other than
captives) will be required.
Insights-LegalPage-Dec2016.indd 82 24/11/2016 10:34:21 AM

2. Insights – Legal page
December 2016 Asia Insurance Review 83
Non-Hong Kong-incorporated in-
surers that are authorised to carry on
insurance business in and from Hong
Kong where their Hong Kong business
exceeds 50% of their annual gross pre-
mium income must also comply with
Revised GN10 unless they obtain a
written exemption from the OCI. Under
GN10, the threshold was 75%.
Captive insurers were expressly
exempted from GN10. They will be
“encouraged to adopt” Revised GN10
as appropriate.
Taking a practical approach, the
OCI relaxes certain provisions of GN10
and Revised GN10 for small insurers
whose annual gross premium income
and total gross insurance liabilities
the preceding financial year were
each below HK$20 million. The finan-
cial threshold remains unchanged
under Revised GN10 but it explicitly
expands the category of small insur-
ers to include qualifying composite
insurers.
Synopsis of key changes
Senior management
Revised GN10 introduces specific pro-
visions on senior management which
includes the chief executive. Their role
is to carry out the insurer’s day-to-day
operations and implement its controls
and systems in accordance with the
strategies, policies and procedures set
by the board.
Senior management appointments
should be authorised by the board, and
their roles, responsibilities and del-
egated authority should be adequately
documented, with appropriate report-
ing lines to the board.
GN10 envisages delegation of some
responsibilities by senior manage-
ment, in particular to Key Persons,
maintaining clear accountability and
reporting lines.
Key Persons
Revised GN10 introduces specific
provisions on Key Persons. Under the
Amendment Ordinance the regulator’s
prior consent for the appointment of
senior executives who carry out “con-
trol functions” of insurers (other than
captives) will be required.
The Amendment Ordinance and
Revised GN10 list the following control
functions: internal audit, risk manage-
ment, financial control, compliance,
actuarial and intermediary manage-
ment. Additional control functions can
be specified by the Financial Secretary
by notice. A control function is likely
to enable the individual responsible for
it to exercise significant influence over
the business of the insurer.
Control functions will be an im-
portant part of an insurer’s risk
management and internal control
system, providing checks and balances,
and supporting the board in fulfilling
its oversight duties.
Remuneration
Following the global financial crisis,
remuneration is an area of regulatory
focus in many jurisdictions. Insurers
are required to establish a board-
approved risk-averse remuneration
policy, in-line with their objectives,
business strategies and long-term
interests, and providing a clear rela-
tionship between performance and
remuneration.
Revised GN10 requires multi-level
involvement within the corporate
governance structure of an insurer in
the setting and monitoring of remu-
neration policy: the board, including
the optional remuneration committee,
senior management and risk manage-
ment Key Persons.
Revised GN10 broadens the scope of
application of the remuneration policy
to cover all directors (including INEDs)
and employees, focusing in particular
onseniormanagement,KeyPersonsand
“material risk-taking employees” (the
latter whom the IAIS refers to as “ma-
jor risk-taking staff”, ie whose actions,
individual or aggregated in groups of
employees, may have a material impact
on the insurer’s risk exposure through
the assumption of material risk or by
taking on material exposure).
Revised GN10 sets out detailed
principles relating to remuneration,
including required characteristics of
performance-measuring criteria ap-
plicable to variable remuneration, and
promoting a complete assessment of
risk-adjusted performance.
Board responsibilities
The board has ultimate responsibil-
ity for setting the business objectives
and strategies taking into account the
long-term financial soundness of the
insurer, fair treatment of policyholders,
and the legitimate interests of its stake-
holders. Policies are to be implemented
by senior management.
Amongst its other duties, the board
should set the risk appetite and strat-
egy and provide appropriate risk
management and internal control
systems. It is responsible for providing
a transparent and reliable financial
reporting system and ensuring there
is adequate governance and oversight
of the external audit process.
Board meetings
GN10 requires a minimum of four,
properly minuted, board meetings per
year, at least two of which must take
place by participation, rather than
by written resolutions. Revised GN10
clarifies that the frequency of these
meetings should be approximately
quarterly. Revised GN10 acknowledges
participation by means of video/tele-
conferencing.
Board composition
Insurers, other than small insurers,
will continue to be required to have a
minimum of five directors, one third of
whom have knowledge and experience
of insurance business. Going beyond
finance and investment expertise that
that were highlighted in GN10, Re-
vised GN10 requires that the board’s
adequate spread and level of expertise
should cover areas such as claims, ac-
tuarial and underwriting, in addition
to the areas of finance and investment
as set out in GN10.
An important check and balance
against the influence of controllers
and management is the requirement
The OCI relaxes certain provisions of GN10
and Revised GN10 for small insurers whose
annual gross premium income and total gross
insurance liabilities the preceding financial year
were each below HK$20 million.
Insights-LegalPage-Dec2016.indd 83 24/11/2016 11:47:07 AM

3. Insights – Legal page
84 Asia Insurance Review December 2016
to have a sufficient number of INEDs
on the board. Small insurers must
have at least one INED, otherwise,
the requirement for the proportion of
INEDs on the board has been increased
in Revised GN10 from 1/5th to 1/3rd.
On a practical note, Revised GN10
allows for a temporary exemption for
the reduction of INEDs where there is
a valid justification.
There are amendments to the in-
dependence criteria of INEDs. In
particular, former employees of the
insurer or its group will be required to
wait three years, whereas GN10 focuses
on current roles only. Under Revised
GN10, the OCI is unlikely to consider
a proposed director to be independent
if he is a director or controller of a
company that has significant financial
interest with the insurer or any group
company, for example, a major service
provider.
Duties of individual directors
A new section on duties of individual
directors builds on the previous re-
quirements. It will require individual
directors, in particular, to:
• exercise due care and diligence;
• act reasonably, in good faith and
honestly;
• act in the best interests of the in-
surer and its policyholders;
• exercise independent judgement
and objectivity in decision-making;
and
• not use his position to gain undue
personal advantage or cause detri-
ment to the insurer.
Additionally, directors should avoid
actual, potential or perceived conflicts
of interest, and those who have other
directorships must ensure they have
sufficient time to carry out their du-
ties to the insurer, including attending
board meetings.
Separation of role of Chairman/
CEO
Under GN10, the Chairman and CEO
should be separate unless there are
appropriate controls. This requirement
has been bolstered further in Revised
GN10. Going forward, the Chairman
should not be the CEO, appointed
actuary or serve as chair of any board
committee.
If the chief executive is temporarily
unable to carry out his duties due to
temporary absence from Hong Kong,
sickness or other exceptional reason,
the board should ensure the continued
proper functioning of the insurer’s
operations. In order to achieve this,
a director or, despite the general
restriction noted in the preceding para-
graph, the Chairman, with proper
control measures in place, can take on
this role.
Committees
Under GN10, other than for small in-
surers, the establishment of an audit
committee is mandatory, unless the
insurer is part of a group which has a
group audit committee. A new require-
ment is that the audit committee should
be chaired by an INED. It should prefer-
ably have an INED majority.
Revised GN10 also makes the
establishment of a risk committee
mandatory for insurers other than
small insurers.
The optional committees which the
board of an insurer should consider
where appropriate having regard to
the insurer’s size, practical needs and
business activities have not changed.
The optional specialised board com-
mittees are the: investment committee;
nomination committee; remuneration
committee; underwriting committee;
reinsurance committee; and claims
settlement committee.
Under Revised GN10 the functions
of committees can be combined so long
as their effectiveness and integrity is
not compromised.
The remuneration committee should
include INED members and be chaired
by an INED. The nomination commit-
tee should include at least one INED.
The responsibilities of the nomination
committee have been expanded to
nominating suitable candidates for
senior management appointments as
well as board roles.
Group committees can be relied on
if they take account of the insurer and
the requirements of Revised GN10 –
otherwise, the board should establish
its own committees.
It may be necessary to consider
rotating the membership of commit-
tees to avoid undue concentration of
powers.
Evaluation
Revised GN10 requires the board to
review, at least annually, each of its
board committees collectively and
their individual members to determine
that they remain effective to carry
out their delegated responsibilities.
Revised GN10 does not have an explicit
requirement requiring an equivalent
annual evaluation of the board col-
lectively and the individual directors,
but insurers might consider this as
best practice. There is a requirement
to address identified weaknesses at
board level, including through director
training.
Appropriate systems of control
should provide for the evaluation of
senior management performance of
objectives set by the board.
Other additions
• Group policies– Revised GN10
expressly permits the use of appro-
priate group policies and procedures
by insurers.
• Business continuity planning – In-
surers will be required to establish
a business continuity policy and
business continuity plan covering
the aspects set out in Revised GN10.
Interestingly, this relates not only to
going-concern situations but also
gone-concern. If an insurer needs
to use its business continuity plan,
it must notify the OCI promptly,
providing information of the dis-
ruption, actions taken, potential
impact and target timeline. Progress
reports will be required until busi-
ness resumes as normal.
• Cyber security – Taking into ac-
count technological advancements
since GN10 was issued, a new sec-
tion on cyber security obligations
has been added.
• Record-keeping – This expands on
existing statutory record-keeping
obligations.
• Customers – The provisions relat-
ing to the servicing of customers
have been strengthened and further
detail added.
Conclusion
As 2017 is just around the corner,
insurers operating in or from Hong
Kong should undertake prompt steps to
perform a gap analysis of their corpo-
rate governance, risk management and
internal control systems framework
against the revised requirements.
Ms Joyce Chan is a Partner and Ms Gillian Morrissey
is a Registered Foreign Lawyer, both at Clyde & Co
in Hong Kong.
Insights-LegalPage-Dec2016.indd 84 24/11/2016 11:48:15 AM