Insurance Bulletin - Hong Kong, Autumn 2024

Parametric Insurance

The increasing unpredictability of climate events – making pricing premiums on historical data difficult – has challenged the traditional insurance model and provided a platform for Parametric insurance to emerge as a solution. Unlike traditional insurance, parametric insurance offers pre-determined payouts once certain conditions are satisfied. For example, Hong Kong's first typhoon warning insurance product by Swiss Re Corporate Solutions, Insur8, is designed to automatically pay policyholders when a typhoon warning signal number 8 or above is hoisted by the Hong Kong Observatory.

Parametric insurance has also been shown to be adept in providing tailored solutions for the insured's particular needs – e.g. providing cover for unexpected business closures in specific circumstances, reimbursement costs due to event cancellations or postponements, and loss of revenue due to reduced productivity as a result of traffic disruption to commuting employees.

This year AXA Hong Kong and Macau also introduced its Heatwave Parametric Insurance aimed at providing cover for outdoor workers from extreme heat conditions during the summer months. The premium of the policy is calculated on a per-head basis with payouts (in the form of monetary compensation or an "anti-heatwave kit") designed to benefit each insured individual once the temperature exceeds 36.0°C for 3 consecutive days during August to October.

To date, the Hong Kong market has embraced the introduction of parametric insurance products and there is currently no specific legislation in respect of these contracts - they are regarded generally as valid insurance contracts capable of being reinsured like their traditional counterparts.

It is noted however, that the US National Association of Insurance Commissioners appear to be considering further regulation for these products, so we continue to monitor developments. Nevertheless, we expect parametric insurance products to continue to gain traction in the region.

Hong Kong's Re-Domiciliation Proposal – Implications for Insurance Industry

The Hong Kong Government's proposal to introduce an inward re-domiciliation regime (the "Proposed Regime") marks a significant development. In line with the broader strategy to enhance Hong Kong's status as a global business hub, the Proposed Regime aims to facilitate relocation of operations to Hong Kong without cumbersome administrative procedures and with lower legal costs. Importantly, business continuity would be preserved in a cost-effective manner as the re-domiciling company would maintain its legal identity during its re-domiciliation. This is particularly advantageous for companies that have established a substantial presence in Hong Kong but are currently domiciled in offshore jurisdictions, such as life insurers currently operating in Hong Kong via branches of Bermuda-incorporated entities.

Although no economic substance test has been proposed, companies looking to re-domicile will need to meet certain eligibility requirements, including compliance with original domicile laws and Hong Kong laws, integrity requirements to protect creditors, members' consent for re-domiciliation, and solvency requirements. Applications will be processed by the Hong Kong Companies Registry, with a processing time of around two weeks from receipt of all required application documents.

The consultation period for the Proposed Regime was concluded on 3 July 2024, and generally has received positive support from stakeholders. The insurance sector has broadly welcomed the proposals, recognising the potential to attract more international businesses.

Insurance Regulatory Changes

Group Supervision

For insurance holding companies that are subject to the Insurance Authority’s ("IA") group supervision regime (i.e. designated insurance holding companies ("DIHC")), a revised Guideline on Group Supervision ("GL32") came into effect on 5 July 2024 (see the guideline here). The three major revisions for DIHC are:

1. Approval or notification required for majority and minority shareholder controllers

   With the classification of majority and minority shareholder controllers introduced by the amendment to the Insurance Ordinance ("IO") in 2023, it is specified that:

   • the IA's prior approval is required where a minority shareholder controller intends to become a majority shareholder controller of the same DIHC; and

   • notification to the IA is required where a majority shareholder controller becomes a minority shareholder controller of the same DIHC.

2. Elaboration on "fit and proper" criteria for shareholder controllers

The IA elaborates on the "fit and proper" regime and the factors that would determine such fitness and properness. In particular, they list out some key aspects that they would take into account such as:

• any past non-compliance with professional and ethical standards of professional bodies;

• the likely or actual level of influence and control over the DIHC by the shareholder controllers;

• the knowledge, experience, competence, soundness of judgement and diligence required for holding a DIHC;

• any clear and detailed strategic objectives and business plans of the supervised group of a DIHC that are realistic, viable and conducive to long-term stability and sustainable development; and

• the commitment, willingness, and financial capacity to maintain the financial soundness of the supervised group of a DIHC.

1. Clarification over directors of DIHC to be considered as independent non-executive directors

The IA also clarifies its position on independent non-executive directors ("INED"), namely that it is unlikely to be satisfied with a person's status as an INED where that person:

• is, or has been within the last three years, an employee of a company within the supervised group;

• is a controller of that DIHC or a company within the supervised group;

• is an associate of a director or controller of a company within the supervised group;

• is a director or controller of a corporation that has significant financial interests with the DIHC or a company within the supervised group; or

• has significant financial associations with that DIHC or a company within the supervised group that may affect the impartiality of independent judgement.

Fees

Separately, effective 23 September 2024, the IA has been charging fees for processing insurance intermediary license applications and related notifications. Details are set out in the Fees Table here.

Individual licensees, insurance agencies, and broker companies are now required to pay for applications for new licenses, renewal of licenses and adding lines of business to their licenses. Fees are also levied for notification of new appointments of principals, and applications for exemptions under section 79 of the IO.

Applications or notifications must be submitted through the IA's e-portal, Insurance Intermediaries Connect ("IIC"). The IA will no longer accept any applications in paper form except for limited circumstances, such as applying for new license as insurance agent or broker company, varying lines of business, or exemption application under section 79 of the IO.

Referrals of Mainland Policyholders in Buying Life Insurance in HK

The IA issued a circular on 22 May 2024 ("Circular") reminding authorised insurers, licensed insurance agencies and brokers of their collective duties when selling long term insurance policies to visitors from Mainland China.

Recent inspections conducted by the IA have revealed that some licensed brokers have failed to maintain adequate controls, processes and risk management over their referral business models. This prompted a joint investigation between the IA and the Independent Commission Against Corruption. The investigation is ongoing and the IA is in contact with some of the licensees.

In the Circular, the IA highlights a few common features of prohibited business models, including:

• Engaging unlicensed individuals to carry on regulated activities on behalf of the brokers, to source Mainland buyers of long-term insurance policies with savings and investment elements;

• Paying excessively high referral fees on successful sales (e.g. paying over 90% of the premium);

• Performing cosmetic form-filling exercises and failing to provide any post-sales ongoing services; and

• Asking customers to sign statements asserting that all regulated activities were carried out by the Hong Kong brokers (when this was not the case) for the purpose of circumventing insurer's controls.

The IA warns that licensed brokers that fail to comply with licensing requirements can, at the very least, expect to have their license revoked and may face criminal prosecutions.

The IA repeats the three key principles for brokers and insurers that rely on unlicensed referrers:

Principle 1 – Unlicensed referrers must not give any regulated advice to clients and must not carry on any regulated activities or sales activities.

Principle 2 – The broker company (and its technical representatives) must give all regulated advice to the client and carry on all regulated activities needed to arrange insurance policies for the client to the minimum standards required in the Insurance Regulatory Framework – namely the IO, the rules, the codes, the guidelines and circulars issued by the IA.

Principle 3 – If any payments are to be offered to referrers by the broker company for introducing clients, such payments should be calibrated to be consistent with (i) the referrers not carrying on regulated activities (and not being incentivized to do so); and (ii) the broker company being properly resourced to provide regulated advice and perform regulated activities for the clients being introduced.

The IA emphasizes that the adequacy of any controls and processes implemented will always be judged on a "substance over form" approach.

This briefing is intended to give general information and assist with an understanding of the subject matter. It is not a complete statement of the law. It is not intended to be relied upon or to be a substitute for legal advice in relation to particular circumstances.