Chapter 3 insurance regulations

Chapter 3
Insurance Regulations
The Presentation Slides for Teaching
Financial Regulations and Compliance Practices
Website : https://sites.google.com/site/quanrisk
E-mail : quanrisk@gmail.com
Copyright © 2021 CapitaLogic Limited

Declaration
 Copyright © 2021 CapitaLogic Limited.
 All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
 Authored by Dr. LAM Yat-fai (林日辉),
Chief Data Scientist, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration,
CFA, CAIA, CAMS, CFE, FRM, PRM, MCSE, MCNE.
Copyright © 2021 CapitaLogic Limited 2

A model financial
regulatory framework
Ordinance
Regulator
Licensing Policy Supervision
Advisory
committees
Enforcement
Industry
associations

Outline
 Insurance Ordinance
 Insurance Authority
 Regulatory duties
 Intermediaries

CAP 41 Insurance Ordinance
 To regulate the carrying on of insurance
business
 To establish the Insurance Authority
 To regulate the insurance industry for
 Protecting policy holders and potential policy
holders
 Promoting the stable development of the insurance
industry
 To provide for related matters

Parts of Insurance Ordinance (1)
Part Topic
1 Preliminary
1A Insurance Authority
2 Authorization
3 Accounts and statement
4 Long term businesses
4A Requirement for assets in Hong Kong
5 Powers of intervention
5A Further regulatory powers on insurers

Parts of Insurance Ordinance (2)
Part Topic
6 Insolvency and winding up
7 Special provisions relating to Lloyd’s
8 Exemptions
9A Certain contracts of insurance to be void
10 Insurance intermediaries
12 Insurance appeals tribunal
13 Miscellaneous

Major functions of the IO
 Insurance businesses
 Insurance regulator
 Insurance licensing
 Insurance intermediaries

Insurance policy
 An agreement between
 A protection buyer who
 is risk averse
 cannot afford the occurrence of a potential event
 seeks compensation in monetary terms in case that potential
event occurs
 A protection provider who
 provides compensation in monetary terms to a protection
buyer in case that particular event occurs
 charges the protection buyer premium
 is skillful in managing risk

Long term insurance
 The insurance policy which lasts for a longer
period of time, e.g. a number of years
 Major long term insurance
 Life insurance
 Retirement plan
 Annuity
 An insurance company carrying on long
term insurance business must employ a
qualified staff actuary

General insurance
 The insurance policy cover only a shorter
period time, usually per event or annually
 Major general insurance
 Travel insurance
 Medical insurance
 Fire insurance
 Vehicle liability insurance

Outline
 Intermediaries

Migration to IA from OCI

Insurance Authority

Insurance Authority
 Long Term Business Division
 Regulation of long term insurance companies
 General Business Division
 Regulation of general insurance companies
 Market Conduct Division
 Regulation of insurance intermediaries
 Policy and Development Division
 AML and InsurTech

Outline
 Intermediaries

Insurance companies
 Statistics
 Long term insurance 53 + 20
 General insurance 91 + 20
 Business model
 Receive premiums from policy holders
 Invest premiums in lower risk financial and/or real
assets
 Provide compensations to beneficiaries

Policy framework
 Amendments to Insurance Ordinance
 Subsidiary legislations
 Other relevant ordinances
 Guidelines
 Circulars
 Domestic co-operations
 International co-operations

Amendments to Insurance Ordinance

Selected subsidiary legislations
of the Insurance Ordinance
 CAP 41A
 Insurance (Actuaries’ Qualifications) Regulation
 CAP 41E
 Insurance (Determination of Long Term Liabilities) Rules
 CAP 41G
 Insurance (General Business) (Valuation) Rules
https://www.elegislation.gov.hk/index/chapternumber?p0=1&TY
PE=1&TYPE=2&TYPE=3&LANGUAGE=E&CAP_NO_FR
=41

Other related ordinances and rules
 CAP 615
 Anti-Money Laundering and Counter-Terrorist
Financing Ordinance
 Applicable to long term insurance only
 CAP 485
 Mandatory Provident Fund Schemes Ordinance

Guidelines and circulars
 Guidelines
https://www.ia.org.hk/en/legislative_framework/guid
elines.html
 Circulars
https://www.ia.org.hk/en/legislative_framework/circ
ulars/reg_matters/circulars_on_regulatory_matters
_2019.html

Domestic co-operations with the MPFA
 Regulations of MPF intermediaries
 Mandatory Provident Fund Ordinance
 Mandatory Provident Fund Schemes Authority
 Registration of MPF intermediaries
 Guidelines on Conduct Requirements for
Registered MPF Intermediaries

International co-operations

Professional development

Supervisory approach

Enforcement
 Insurance Ordinance grants very limited
investigative power to the IA
 Anti-money laundering and counter-terrorist
financing
 Empowered by the AMLO
 MPF intermediaries
 MPFA empowered by the MPFO
 SFC empowered by the SFO
 MoUs entered among the IA, MPFA and SFC

Outline
 Intermediaries

Market participants
Insurance
companies
Insurance agents Insurance brokers
Authorized
insurer
Intermediaries

Insurance intermediaries
 Insurance agent
 Represents an insurance company
 To negotiate an insurance policy with the policy holder
on behalf of an insurance company
 Insurance broker
 Represents an insurance policy holder
 to negotiate an insurance policy with the insurance
company on behalf of a policy holder
 Conflicts of interest
 An entity cannot act as both an agent and a broker

Individual licenses
 Insurance agent
 Work level, employed by an insurance company
directly
 Technical representative
 Work level, employed by an agency firm or
brokerage firm
 Responsible officer
 Senior management

Statistics of intermediaries
 Agents
 89,024 licenses
 Insurance agency
 2,307 firms
 26,484 technical representatives
 Insurance broker company
 825 firms
 22,106 technical representatives

Insurance intermediaries
qualifying examinations
 Principles and practice of insurance examination
 Long term insurance examination
 General insurance examination
 Investment-linked long term insurance examination
 Travel insurance agents examination

Banks selling insurance
 A bank acting as an intermediary for at most
two insurance companies is exempted from the
insurance licensing regime
 The HKMA becomes the frontline regulator
supervising the sales and marketing activities

Insurance Advisory Committees
 Industry Advisory Committee on Long Term Insurance and
Industry Advisory Committee on General Insurance
 To advise IA on matters in relation to insurance businesses
 Members of the two advisory committees come from different
lines of business with expertise within the insurance industry
and from related fields such as consumer protection,
accounting, insurance law and compliance, academia, banking
and management
https://www.ia.org.hk/en/aboutus/governance/industry_advisory_
committees.html

Industry associations
 Hong Kong Federation of Insurers
 Formed by major insurance companies
 To balance the benefits and conflicts between regulator and
insurance companies
 Hong Kong Confederation of Insurance Brokers and
Professional Insurance Brokers Association
 Formed by major insurance brokerage firms
 To balance the benefits and conflicts between regulator and
brokers

Reference
 VTC 2018. Study Notes for the Principles and
Practice of Insurance Examination.

Chapter 3 insurance regulations

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