Insurance broker commissions in the headlines in Hong Kong

Insurance broker commissions in Hong Kong are attracting more attention in Hong Kong than, perhaps, the market would like.

Earlier this year, the High Court in Hong Kong handed down an important judgment in Hobbins v Royal Skandia Life Assurance Ltd and Clearwater International Ltd [2012] 1 HKLRD 977 (click here to read).  The judgment is the first in Hong Kong to find that (in a civil context) such commissions are not illegal secret profits.

Two principal matters are dealt with in the judgment.

Agency

As a matter of Hong Kong law, the judgment upholds the commercial practice of the broker acting as agent of the insured, not the insurer, with respect to business placed.

There was no dispute that the broker (Clearwater) was the insured's agent.  However, on the basis of the contractual agreement with the insurer (Skandia), the court found that the broker was not the insurer’s agent; indeed, there was an express term to this effect in the agreement.

The judgment is the first in Hong Kong to examine market practice in this regard.  It notes that:

“…it has long been established at common law that insurance brokers (such as Clearwater) are acting solely as agents for an insured. The mere fact that an insurer pays brokerage fees to a broker does not mean that the broker is undertaking to perform any obligation on behalf of the underwriter”.

Legality

The judgment finds that (in a civil context) commissions paid by an insurer to a broker with respect to business placed do not contravene Hong Kong's Prevention of Bribery Ordinance (section 9 - "Corrupt transactions with agents"); neither, according to the judgment, do such commissions constitute illegal secret profits, unless they are in excess of what is normally paid in the market. 

In this regard, the judgment reads: 

“… there is ‘lawful authority’ (consisting of a long line of judicial pronouncements stretching from the 19th century to the present) for the commercial practice that an insurance broker acts as an agent of the insured and not of the insurance company. As a result of that line of judicial pronouncements, it has long been settled at common law that commission paid to an insurance broker by an insurer does not constitute an illegal secret profit unless it is in excess of what is normally paid within the insurance market”.

In this case, there was no evidence that the commission paid by the insurer was otherwise than in line with market practice.

Appeal

The insured had appealed and the appeal hearing was due to be heard on 5 December 2012. However, the hearing may not take place as the insured's chances of success are considered limited and there are probably commercial reasons to settle.

Regulation

In the meantime the local market watches on.  Industry broker organisations in Hong Kong are recommending that best practice requires a broker give a client written confirmation of the percentage range of commissions payable out of the premium charged by the insurer with respect to any proposed or renewed policy.

In a wider context best practice disclosure requirements should generally be of interest to other industry or service sectors in Hong Kong in which intermediaries have historically been paid commissions. For example, estate agents, travel agents, recruitment agents and mortgage referral agents.  As the judgment notes:

"The practice of insurers paying commission to insurance brokers may or may not be unsound.  It ought possibly to be strictly regulated or even prohibited altogether.  I express no view on the matter. That is a question of policy best left to the legislature, not the Court, to tackle".