As Hong Kong moves towards the millennium, Peter Cashin and Timothy Ingham discuss topical issues relevant to the insurance industry.
Statistics from the Insurance Authority reveal that as at the end of February 1998 there were 214 authorised insurers in Hong Kong. Of these, 151 were general insurers, 45 were long term insurers and the balance of 18 were composite insurers (both general and long term). The Hong Kong Federation of Insurers reported that as at 19 May 1998, the Insurance Agents Registration Board had registered 37,004 insurance agents in Hong Kong, an increase of 14.7% from the prior year. The two registered broker bodies under the Insurance Companies Ordinance reported a total membership of insurance brokers between them of 327. This was divided between the Hong Kong Confederation of Insurance Brokers (198) and the Professional Insurance Brokers Association Limited (129).
Government policy affecting insurers
In the Policy Programmes delivered with the Policy Address by the Chief Executive of the Hong Kong Special Administrative Region (Hong Kong) on 8 October 1997, the Financial Services Bureau set out its objectives for Hong Kong. Those objectives were to maintain Hong Kong as an international financial centre with a stable financial system in furtherance of the requirements of the Basic Law. In particular its objective was to provide an appropriate legal, regulatory and administrative framework to protect the interests of depositors, investors, shareholders, insurance policyholders and members of occupational retirement schemes and mandatory provident schemes. This would enable Hong Kong to compete effectively with other major financial centres. Two of its seven major programmes were the Mandatory Provident Fund (MPF) scheme and the insurance companies and occupational retirement schemes. In the former, the Bureau aimed to finalise legislation necessary for the introduction of the MPF and then to ensure that the MPF was implemented. In relation to insurance companies and occupational retirement schemes, the Bureau set its aim as ensuring adequate supervision of the insurance industry with a view to protecting the interests of policyholders and ensuring voluntary occupational retirement schemes are managed properly so as to protect the interests of its members.
The 18,000 occupational retirement schemes either registered or exempted under the Occupational Retirement Schemes Ordinance provide benefits for only 3% of Hong Kong's working population. In that context in the second quarter of 1997 there were some 300,000 business establishments in Hong Kong and 3,000,000 people in the workforce. The objective of the MPF scheme was to extend coverage of the workforce and to generate fund assets of HK$10 billion annually in the initial years of operation rising to HK$40 billion when the system matured after approximately 30 years. This was to be achieved by levying upon both employers and employees a compulsory contribution of 5% of the employee's monthly remuneration subject to certain maximums. Some insurers expected an obvious flow-on effect in their businesses. The main features of the scheme are that it is mandatory (with few exceptions), accrued benefits under the scheme will be portable, preservation will prevent early withdrawal of benefits before age 60 with limited exceptions, all contributions will be fully vested and contribution will be compulsory. Recent announcements from the Mandatory Provident Fund Authority have revealed that the scheme will commence by the year 2000 at the very earliest.
Also of significance to insurers was the foreshadowed infrastructure developments. When the Chief Executive delivered his address on 8 October 1997, a number of plans were foreshadowed including a new MTR north line from Central to Wanchai and Causeway Bay, a possible extension to south Hong Kong island, a new East Kowloon line to serve Kai Tai, an extension of the MTR island line to Kennedy Town and Green Island, a second connection from the Ma On Shan railway into Kowloon and the fourth cross harbour rail route. A road improvement programme was also announced including widening the Tolo-Fanling Highways, completing Route 9 between northwest Ching Yi and Laichikok and building a link between north Lantau and northwest New Territories. Plans were to be developed for a new western highway, a new eastern highway, an east-west connection route and a central Kowloon route to ease traffic flow from east to west.
Government policy implementation
In October 1997, the increased solvency margin for general insurers came into operation increasing the minimum to HK$10 million or HK$20 million depending upon whether statutory business was transacted (a higher limit applying to statutory business).
To further aid in the prudential supervision of long term insurers, the Insurance Authority announced an intention to introduce professional standards for actuaries appointed to ensure the financial soundness of long term insurers. The Insurance Companies (Actuary Standards) Regulations are now being prepared.
Looking forward to 1999, insurers are responding to corporate as well as underwriting issues associated with the approach of the millennium. In 1997 the Insurance Authority issued a circular on the millennium "Millennium Bug/Year 2000 problem". In summary, the circular required insurers and insurance brokers to review existing software applications to assess the potential impact and check software licence agreements and consultancy agreements on year 2000 compliant upgrades. The Authority urged insurers to prepare project plans, prioritise work to be undertaken and estimate the cost of doing so. At the same time the Hong Kong Federation of Insurers set up a Taskforce to consider the millennium problem. The Secretary for Financial Services appointed a Steering Committee in March 1998 to co-ordinate the response to the problem. The Insurance Authority is a member of the Steering Committee.
The Insurance Authority in 1997 also continued to promote Hong Kong as an international insurance centre and the captive insurance regime which provided for a reduced paid-up capital requirement of HK$2 million and reduced solvency margin of the greater of 5% of net annual premium or 5% of net claim outstanding subject to a minimum capital requirement. Such promotion was facilitated by the launch of the Authority's home page on the internet in August 1997. In the budget for 1998/99 the Financial Secretary announced that profits tax for offshore business of professional reinsurance companies authorised under the Insurance Companies Ordinance in Hong Kong would be 8%, one half of the profit tax rate otherwise applying.
The Asian financial crisis
At the same time as the Chief Executive set out the Bureau's objectives many ASEAN countries began to feel the effects of regional financial turmoil. In the 1998/99 budget paper entitled "Riding out the Storm" the Financial Secretary of Hong Kong commented that "the turmoil induced the major speculative attack on the Hong Kong dollar, tightened liquidity of the banks, higher local interest rates and a severe setback on the local stock market. Although our currency link and the financial sector as a whole stood firm throughout the turmoil, business suffered and the economy took a significant downturn towards the year end." In the context of the economic climate the 1996 results of the insurance industry published in the 1997 Annual Report of the Office of the Commissioner of Insurance are worthy of note. The report revealed that for 1996, total gross general insurance premium (including direct and reinsurance inward business) declined from approximately HK$20 billion in 1995 to HK$18.7 billion in 1996, a reduction of some 7%. Of this gross premium for direct business was HK$14.2 billion. Table 1 outlines the major lines of business contributing to that gross premium. Gross premium for reinsurance inward business for 1996 was HK$4.4 billion and Table 2 outlines the proportions of gross premium contributable to the major classes of business. In both cases the majority of premium was attributed to property damage insurance (insurers 27%; reinsurers 47%). Employees compensation insurance premium suffered the most significantly - a decline in gross premium of 24.6%. Gross premium for long term business increased from HK$16.6 billion in 1995 to HK$19.6 billion in 1996. The composition of gross premiums in terms of classes of insurance are revealed in Table 3. (Table Nos. 1-3 in this article are reproduced from the 1997 Annual Report with the kind permission of the Insurance Authority.)
The past work of the Insurance Authority including the introduction of Asset Valuation Regulations has served the industry well through more difficult times. Local assets as at the end of 1996 for general insurers other than professional reinsurers of some HK$23 billion were comprised of approximately HK$7.65 billion in bank deposits and deposits with Deposit Taking Companies. Land and Buildings and Fixed and Variable Securities amounted to approximately HK$1.3 billion and HK$2.9 billion respectively. As Hong Kong deals with the economic climate towards the millennium the Insurance Authority is well placed to promote the industry in Hong Kong and facilitate its continued security and transparency.
Peter Cashin and Timothy Ingham jointly head up the insurance and reinsurance department of Cameron McKenna in Hong Kong. They both have extensive experience in contentious and non-contentious insurance and reinsurance legal matters. Mr Cashin is deputy chairman of the legal affairs working group of the General Insurance Council. Mr Ingham is counsel to the Hong Kong Confederation of Insurance Brokers.