LI, Tao @ Hong Kong

Govt proposes a plan to protect consumers from insurer losses

The Hong Kong government plans to set up a fund that will protect insurance policy holders from losses arising from the insolvency of insurers, according to Financial Services and the Treasury Bureau, which launched a consultation on the proposal Friday.

The proposed establishment of a policyholders’ protection fund – to be set at 100 percent compensation for the first HK$100,000 plus 80 percent of the balance of the claim – will pay up to a total of HK$1 million to policyholders whose policies were written in Hong Kong in case an insurer becomes insolvent, according to the proposal.

The fund will comprise of two separate and independent schemes that will cover all individual life and non-life insurance policies. The government has targeted for an initial fund size of HK$1.2 billion for the life scheme and HK$75 million for the non-life scheme. It also plans to build up the initial target fund in 15 years.

The entire levy will be collected from the city’s insurers and the initial rates for both schemes were set at 0.07 percent of the applicable premiums, according to the paper.

Commissioner of Insurance Annie Choi said that since the levy rate has been established at a very low level, it is unlikely that the city’s insurers will pass on the costs to their customers.

“Given that the number of insurance companies operating in Hong Kong is so large, fierce competition will prevent them from raising premium levels,” Choi added.

The Hong Kong insurance market has grown very rapidly over the past few years. According to provisional government figures, gross insurance premiums received in 2010 amounted to HK$207.2 billion, a 33 percent increase compared with HK$156 billion in 2006.

One Hong Kong-based insurance analyst who spoke to China Daily on condition of anonymity said that the plan wouldn’t be very effective if one of the big international players in town found itself in financial trouble. Citing insurers such as AIA, Manulife Financial and Prudential – which dominate the life insurance product market – the analyst said that the HK$1.2 billion salvage money would be a nominal amount since annual premiums in the city amounts to hundreds of billions of dollars.

However, the city’s regulators believe that the compensation fund is necessary to enhance public confidence as well as the competitiveness of the insurance industry in Hong Kong.

Based on industry data as of end-2009, the HK$1 million compensation cap will be able to meet more than 80 percent of the claims arising from life policies, and will entirely meet some 96 percent of non-life policies, according to the government.

Owing to the long-term nature of life insurance products, it will be in the interest of policyholders to continue their life policies, therefore the liquidator will seek to transfer the policies to another insurer, the government added. Such a transfer would also be subject to a compensation limit of HK$1 million per policy.

A non-transferable insurance product will either be settled on any claims arising upon its continuation until expiry, or be paid the losses arising from the premature termination of the policy, capped to the same compensation limit per policy, according to the consultation paper.

Large commercial entities will not be included in the scheme, however. The government said it will take into account public views on whether small and medium enterprises should also be included.

The public review will wind up on June 24. The fund is projected to be put into practice in 2014 or 2015, according to the government.

China Daily

(HK Edition 03/26/2011 page2)

http://www.chinadaily.com.cn/hkedition/2011-03/26/content_12230217.htm