Work of the Insurance Authority

The Insurance Authority (“IA”) maintains high standards of supervision and facilitates market developments which enhances the stability of the insurance market and strengthens Hong Kong’s status as an international insurance centre.

Supervision of Insurers

Financial Examination
IA is responsible for monitoring and scrutinizing the financial position of insurers. This responsibility is carried out by examining financial statements and returns as well as analysing critical areas to ensure that insurers comply with solvency standards and other requirements stipulated in the Insurance Companies Ordinance (“ICO”). Attention is primarily focused on key risks that have material impact on the financial strength and sustainability of an insurer, with due emphasis placed on adequacy of paid-up capital, asset quality, reserving position and reinsurance arrangements.

Recognising the looming threat of new infectious diseases and other emerging risks, the IA continued to carry out evaluations on the reinsurance arrangements and other risk management measures adopted by Employees’Compensation (“EC”) insurers. Those insurers not having a “buy-back”cover must demonstrate that they have refrained from underwriting EC business that poses greater exposure to infectious disease risks. All general insurers are required to file an annual submission of reinsurance arrangements and a brief description of guiding principles in setting the retention level and treaty limit for all classes of business.

On-site Inspection
The IA conducts on-site inspections to acquire better market knowledge and improve direct communication with the industry. Such inspections concentrate on areas like underwriting, claims handling, asset management, reinsurance arrangements and supervision of intermediaries, the scope and depth of which vary depending on the nature or level of risks involved. The inspection teams will focus on risk management and internal control systems to ensure that business is conducted orderly and in accordance with policies formulated by the Board of Directors or senior management. They will also verify compliance with the standing requirements on maintenance of assets in Hong Kong, corporate governance, prevention of money laundering, as well as selling of insurance policies to Mainland visitors.

Market Consolidation
The IA closely monitors all mergers and acquisitions within the insurance industry to ensure that the interests of policyholders in Hong Kong are safeguarded both during and after these corporate reorganisation activities.

Merger and Acquisition
The following merger and acquisition activities took place during the year:

• Gerling-Konzern Allgemeine Versicherungs-Aktiengesellschaft was merged into HDI Industrie Versicherung Aktiengesellschaft (“HDI”) in accordance with the universal succession merger process under the German law in late September 2007. HDI was newly authorised to carry on business in Hong Kong on 2 August 2007. After completion of the merger on 24 September 2007, HDI was renamed HDI-Gerling Industrie Versicherung AG, and Gerling-Konzern Allgemeine Versicherungs-Aktiengesellschaft was de-authorized on 7 December 2007.
  
  
• AXA Wealth Management (HK) Limited (formerly known as Winterthur Life (Hong Kong) Limited (“Winterthur Life”)) was wholly acquired by AXA China Region Limited, the immediate holding company of AXA China Region Insurance Company (Bermuda) Limited, on 27 April 2007. After this acquisition, Winterthur Life was renamed as AXA Wealth Management (HK) Limited to reflect the change in ownership.
  
  
• Crown Life Insurance Company (“Crown Life”), formerly owned by HARO Financial Corporation and Extendicare Inc., became a wholly-owned subsidiary of the Canada Life Assurance Company (“Canada Life”) on 5 July 2007 after Canada Life acquired all the shares of Crown Life.
  
  
• The intermediate holding company of Fortis Insurance Company (Asia) Limited (formerly known as Pacific Century Insurance Company Limited (“Pacific Century”)) was acquired by Fortis Insurance International N.V. on 15 May 2007. After the acquisition, Pacific Century was renamed as Fortis Insurance Company (Asia) Limited to reflect the change in ownership.
  
  
• Hang Seng Insurance Company Limited ("HSIC") acquired 50% of the shares of Hang Seng Life Limited ("HSLL") each from Hang Seng Bank Limited ("HASE") and HSBC Insurance (Asia-Pacific) Holdings Limited on 25 September 2007. HSLL has since become a wholly-owned subsidiary of HSIC which in turn is wholly-owned by HASE.
  
  
• MetLife Fubon Limited, formerly a joint venture of MetLife Worldwide Holdings, Inc., and Fubon Life Assurance Co., Ltd., became a wholly-owned subsidiary of MetLife Worldwide Holdings, Inc. on 28 June 2007 after MetLife Worldwide Holdings, Inc., acquired the remaining 50% shareholding from Fubon Life Assurance Co., Ltd.

Transfer of Insurance Business
Under section 24 of the ICO, an insurer who seeks to transfer its long term business to another insurer is required to apply to the court for an order sanctioning the scheme of transfer. An insurer intending to transfer its general business portfolio to another insurer may do so under section 25D of the ICO by obtaining the approval of the IA. During the year, applications in respect of these two types of business transfer are summarised in Figure 1.1.

Figure 1.1 Transfer of Insurance Business

Under section 24 of the ICO
Date of Sanction by the Court	From	To
8.11.2007	Hang Seng Life Limited	Hang Seng Insurance Company Limited
Under section 25D of the ICO
Date of Approval by the IA	From	To
10.4.2007	Jerneh Insurance (HK) Limited	HSBC Insurance (Asia) Limited
27.8.2007	Hang Seng Insurance Company Limited	Hang Seng General Insurance (Hong Kong) Company Limited
21.9.2007	National Insurance Company, Limited	The New India Assurance Company, Limited
8.11.2007	Overseas Union Insurance, Limited	UOB Insurance (H.K.) Limited
15.11.2007	Sun Alliance and London Insurance plc	Royal & Sun Alliance Insurance plc

New Authorisation
The IA authorised five new insurers in 2007, comprising four general insurers and one long term insurers. The list of authorised insurers as at 31 December 2007 and changes of authorised insurers during the reporting period are summarised at Appendices 3 to 6.

Figure 1.2 New Authorisation

	Place of Incorporation	Type of Business
Assuranceforeningen Gard-gjensidig-	Norway	General
FM Insurance Company Limited	United Kingdom	General
Royal & Sun Alliance Insurance plc	United Kingdom	General
HDI Industrie Versicherung Aktiengesellschaft	Federal Republic of Germany	General
BEA Life Limited	Hong Kong	Long Term

Legislative Developments

As part of an on-going exercise to review provisions in the ICO, the IA will propose some amendments to bring about better transparency and supervisory standards in keeping with international developments. The insurance industry will be consulted on these proposals at an appropriate juncture.

Policyholders' Protection Funds

Many developed economies have some forms of policyholders’protection funds (PPFs) in place for providing protection to policyholders in case of insurer insolvencies. In view of this, the Government had carried out a consultancy study on the feasibility of establishing PPFs in Hong Kong. Stage 1 of the study commenced in 2002, and it comprised a background review and a feasibility study on establishing PPFs.

A consultation paper was issued in December 2003 and based on the findings, a final report was issued by the consultant in April 2007. The report revealed that views on the subject were diverse. While more than half of the respondents were holding neutral views, some respondents opposed to the proposal on grounds of high cost and moral hazard, and others indicated their support for this safety net.

Having considered the result of the consultancy study, the Government will consider exploring the feasibility of setting up a post-funded contingency plan with defined scope and parameters to cater for insurer insolvency cases in future.

Employees' Compensation Insurance Residual Scheme

The EC Insurance Residual Scheme (“Scheme”) was successfully launched on 1 May 2007 as a venue of last resort catering for employers who are unable to secure coverage from the open insurance market. This represents an industry initiative to address public concerns over lack of coverage for certain high-risk trades and emerging calls for a central EC scheme.

The Scheme is operating on a co-insurance arrangement entered into by all EC insurers. Any employer who has been declined by no less than 3 insurers in a row or has received 3 successive quotations in excess of the benchmark premium rate are eligible to apply for coverage. An independent actuarial firm has been engaged to derive and regularly update the benchmark premium rates applicable to 19 high-risk trades, while a loading or discount may apply to these rates to encourage employers to adopt good safety practices.

Shenzhen Bay Port Hong Kong Port Area ("HKPA")

The Government has entered into a market agreement with insurers to extend the territorial scope of all existing motor and EC insurance policies to cover the HKPA after it began operation on 1 July 2007.

The HKPA, which includes the Shenzhen section of the Shenzhen Bay Bridge (“Bridge”), was set up and brought within the jurisdiction of the Hong Kong Special Administrative Region under the Shenzhen Bay Port Hong Kong Port Area Ordinance (“HKPA Ordinance”). The HKPA Ordinance confers no retrospective effect on pre-existing contractual rights and obligations under private documents concluded prior to 1 July 2007. Therefore insurance policies issued prior to that date would not automatically cover the HKPA. This posed potential problems to motor and EC policyholders who would need to individually seek extension of coverage.

To address this problem, the IA and The Hong Kong Federation of Insurers (“HKFI”) have taken initiative to explore possible solutions that would be cost-effective and convenient to policyholders. Following deliberations and an on-site visit to the Bridge, insurers agreed to extend the insurance coverage of their existing motor and EC policies to include the HKPA without the need for issuing an endorsement and at no extra premiums. On behalf of the Government, the IA signed a market agreement with each of these insurers in June 2007.

Facility for Terrorism Risks

EC Insurance Business
Since January 2002, Government has provided direct insurers carrying on EC business with a facility up to $10 billion in aggregate ("the Facility") to cater for claims arising out of terrorism. This is intended to cope with a withdrawal of reinsurance cover following the September 11 terrorist attacks in the United States.

By the end of 2007, 63 EC insurers have joined the Facility and paid a monthly charge of 3% on their gross premiums, thereby enabling them to cover employment-related claims for death and bodily injuries caused by terrorist acts. Government will keep in view developments and withdraw the Facility once reinsurance capacity returns to the market.

Motor Insurance Business
In parallel, the Motor Insurers' Bureau of Hong Kong has made available a facility of up to $200 million from its First Fund since January 2002 to satisfy claims of third parties who suffer death or bodily injuries caused by terrorist acts through the use of motor vehicles in Hong Kong.

Supervision of Insurance Intermediaries

Agents
Part X of the ICO provides for a self-regulatory system of insurance agents in Hong Kong which is operated through the Insurance Agents Registration Board (“IARB”). The IA works closely with the IARB on policy issues relating to supervision of insurance agents, including those relating to the handling of complaints against them and the monitoring of their compliance with the Code of Practice for the Administration of Insurance Agents.

Brokers
An insurance broker in Hong Kong must either be a member of a self-regulatory body of insurance brokers approved under section 70 of the ICO or authorised under section 69 of the ICO. At present, there are two bodies of insurance brokers approved, namely the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association. The IA liaises closely with the two bodies of insurance brokers on policy issues relating to their exercise of their self-regulatory functions.

Statistics
Statistics on insurance intermediaries, their responsible officers, chief executives and technical representatives as at 31 December 2007 are shown at Appendix 7.

Promulgation of Guidance Notes

The IA reviews and updates different guidance notes promulgated to the industry from time to time. A full list of these guidance notes is at Appendix 8.

Anti-Money Laundering and Combating Terrorist Financing

Hong Kong is a member of the Financial Action Task Force on Money Laundering ("FATF") which is an international organization committed to combating money laundering and terrorist financing activities. Hong Kong is also a founder member of Asia-Pacific Group on Money Laundering ("APG") since 1997. The FATF sets the international benchmark for a robust anti-money laundering and counter-terrorist financing ("AML/CFT") regime in its Forty Recommendations and Nine Special Recommendations. Every member of the FATF is subject to mutual evaluation on compliance with the standards as contained in the Recommendations. The third round of Mutual Evaluation on Hong Kong by the FATF took place in November 2007.

The assessment team met with the OCI and HKFI to discuss issues concerning the AML/CFT regime as applied to the insurance sector. The assessment team will issue a Mutual Evaluation Report on the overall AML/CFT regime of Hong Kong in mid-2008. It will highlight some recommendations for improvement of our AML/CFT regime.

To ensure that the anti-money laundering framework in Hong Kong is on a par with prevailing international standards, Government is contemplating legal obligations on customer due diligence and record keeping. The IA is working with relevant parties on this initiative and will consult the industry in during the process.

On the front of our ongoing educational efforts , the IA convened two Anti-Money Laundering Seminars jointly with the Narcotics Division and the Joint Financial Intelligence Unit on 8 and 18 June 2007 to keep the insurance industry abreast of the latest development of the AML/CFT regime. The seminars were well received by over 400 insurance practitioners, including chief executives, compliance officers and training managers of insurance institutions.

On reporting of suspicious transactions, the IA has continued to circulate updated lists of suspected terrorists published by international sources or gazetted under local legislation. A total of 311 suspicious transaction reports were made by the insurance industry in 2007.

Economic Summit on China's 11th Five-Year Plan and Development of Hong Kong

The Government issued the Report on Economic Summit on “China's 11th Five-Year Plan and the Development of Hong Kong”(“Report”) in January 2007. The Report explores the opportunities and challenges arising from the Mainland’s 11th Five-Year Plan and the strategies Hong Kong should adopt in the economic development of the Mainland.

In respect of the insurance sector, specific recommendations have been proposed in the Report to enhance cooperation with the Mainland for further development of the insurance and reinsurance industries in Hong Kong. Major recommendations include development of captive insurance in Hong Kong as well as introduction of rural area micro insurance and specialised commercial liability insurance products in the Mainland. The IA is in close liaison with the Mainland authorities on implementation of the recommendations.

The Mainland and Hong Kong Closer Economic Partnership Arrangement ("CEPA")

Since the operation of CEPA with effect from 1 January 2004, Hong Kong insurers and individual industry practitioners are permitted to engage business in the Mainland upon fulfillment of certain conditions. With the signing of Supplement IV to CEPA on 29 June 2007, there are further liberalization measures in the insurance sector. They include the setting up of an examination centre in Hong Kong for the Mainland qualifying examinations for insurance intermediaries and the permission of Hong Kong insurance agency companies to set up wholly-owned enterprises in the Mainland to provide insurance agency services to the Mainland insurance companies.

These liberalization measures, which are in operation as from 1 January 2008, facilitate Hong Kong residents to obtain the Mainland’s insurance qualifications and Hong Kong insurance agency companies to operate agency business in the Mainland. The IA will continue to pursue a wider scope of market liberalization for further benefits of the insurance industry in Hong Kong.

International and Domestic Cooperation

Globalization, expansion of financial conglomerates and strategic alliances among financial service providers have driven regulators worldwide to enhance their mutual communications in exchanging information and experience. In this regard, the IA has maintained regular dialogue with local and overseas financial service regulators, and actively participated in international conferences and seminars.

To enhance international cooperation with overseas regulators on insurance supervision, the IA has concluded a memorandum of understanding on cooperation both with the Australian Prudential Regulation Authority and the Insurance and Pensions Authority of Isle of Man in February 2007.

To strengthen the supervisory cooperation and exchange of information between the OCI and the Financial Reporting Council, the two regulators concluded a Memorandum of Understanding on 19 December 2007.

In October 2007, the Commissioner attended the 14th IAIS Annual Conference and committee meetings held in the USA. Through its membership on the IAIS Insurance Fraud Subcommittee, the IA has actively contributed towards the development of international standards on supervision of insurance fraud.

During the year, the IA received official delegations from Brunei and the Mainland. On its part, the IA has actively participated in seminars and conferences organized or co-organized by International Association of Insurance Supervisors, Financial Stability Institute, Financial Services Authority of the United Kingdom and Office of the Superintendent of Financial Institutions of Canada. The IA attended the 7th Asian CEO Insurance Summit held in Singapore in March 2007.

The IA has a close working relationship with the China Insurance Regulatory Commission (“CIRC”), insurance regulator in the Mainland. In June 2007, the IA organized a Seminar on Asset Management of Insurance Funds in Hong Kong to facilitate exchange of views amongst CIRC officials, industry practitioners and the Mainland stakeholders. Besides, a meeting was held in Shenzhen in November 2007 amongst insurance regulators of Guangdong, Hong Kong, Macao and Shenzhen.

Locally, the IA participated in regular meetings of the Council of Financial Regulators and the Financial Stability Committee to discuss regulatory issues and matters with implications on economic stability. The IA has also established close contact with the insurance industry and frequently meets the HKFI and other industry bodies to discuss topical issues concerning the industry.

New Promotional VCD/DVD –"Hong Kong –An International Insurance Centre"

Promoting Hong Kong as an international insurance hub characterized by our favorable business environment and world –class regulatory regime, as well as our unparalleled advantage as the gateway to the Mainland, the promotional VCD/DVD –“Hong Kong –An International Insurance Centre”, produced by a professional film producer for the IA, was completed during the year. Copies of the promotional VCD/DVD have been distributed to the international business society through the network of Hong Kong Economic and Trade Offices located in different countries.

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