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Following is the speech by the Secretary for Financial Services, Mr Rafael Hui, in moving second reading on the Insurance Companies (Amendment) Bill 1999 in Legislative Council today (Wednesday):
Madam President,
I move that the Insurance Companies (Amendment) Bill 1999 be read a second time.
One of the government objectives in submitting the Bill is to strengthen the regulation of Lloyd's so as to provide a level playing field for all insurance operators in Hong Kong. Another objective is to accelerate the submission of financial information by insurers and to require insurers to submit claims statistics covering a longer period of time. This would enable the Insurance Authority to monitor the financial position of the insurance industry more effectively and protect the interests of policyholders.
There are three areas where we would like to seek improvements.
Lloyd's
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First of all, we propose to strengthen the regulation of Lloyd's. In considering ways to step up the regulation of Lloyd's, we have in mind the long-established principle of providing a level playing field for all market players. It is precisely for this reason that, when drawing up specific proposals on regulatory requirements, we have had to take into account the unique mode of operation of Lloyd's, which is different from that of the conventional insurance companies.
Lloyd's is an association of underwriters established during the 17th century in London, the United Kingdom. It is not a conventional insurance company but rather a market place for its members to conduct insurance business as sole traders in the form of syndicates. Owing to its historical background and unique mode of operation, the operations of Lloyd's are different from those of the conventional insurance companies.
The operation of Lloyd's has a long history It enjoys international reputation and is recognised by many countries. In view of these, Hong Kong has made special provisions to regulate its business, just as many countries have done. Lloyd's is only required to appoint an authorised representative in Hong Kong; to submit a copy of the annual returns which it submits to the regulator in the United Kingdom; and to pay an annual authorisation fee, whereas all other insurance companies are subject to the provisions of the Insurance Companies Ordinance in full, including maintenance of local assets, submission of local business returns and the interventionary powers of the Insurance Authority.
The insurance industry have expressed concern over the preferential treatment currently enjoyed by Lloyd's under the Ordinance, particularly in the light of Lloyd's financial difficulties in the late 80's and early 90's, as well as its arrangement to admit legal persons with limited liability as members. It is questionable whether the existing regulatory framework for Lloyd's is adequate to protect the interests of Hong Kong policyholders and is consistent with our policy of providing a level playing field for all market players.
We propose to amend the Ordinance to strengthen the regulation of Lloyd's in Hong Kong. Under the proposal, Lloyd's will be subject to the regulatory requirements applicable to other authorised insurers, including requirements with respect to solvency margin, local assets, fit and proper management, financial reporting and regulation of its insurance agents, with suitable modifications in recognition of its unique mode of operation and accounting system. Lloyd's will also be subject to the interventionary powers of the Insurance Authority. The new regulatory system is in line with those requirements applicable to Lloyd's in other comparable jurisdictions, including Singapore and Australia.
Acceleration of Submission of Financial Information
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Secondly, we propose to accelerate insurers's submission of financial information. Under the Ordinance, an insurer is required to submit to the IA the Hong Kong General Business Return and the Statement of Assets and Liabilities relating to its Hong Kong general business within six months from the end of its financial year. Such information is important for the Insurance Authority to appraise and monitor the local operations and financial strength of insurers.
In the context of a rapidly changing business environment, the existing statutory time limit of six months is considered excessive. We propose to shorten the time limit to four months so as to allow the Insurance Authority to undertake appraisals and, if necessary, take remedial actions in a more timely manner to protect the interests of Hong Kong policyholders. The acceleration of the submission of financial information may also speed up the issue of industry statistics by the Insurance Authority, and therefore enhance the market transparency.
Having regard to the constraints imposed by the insurers' accounting practices and the capability of the auditing profession to cope with such a requirement, the time limit of four months is considered appropriate. It is also in line with the requirement applicable to the banks incorporated in Hong Kong.
As regards the accounts and statements relating to global business, we agree in consultation with the industry that the time-limit for the insurers to submit such information should be maintained at six months.
Provision of claims statistics for a longer development history
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Thirdly, we propose to require authorized insurers to submit claims development statistics for a longer period of time. Claims liabilities of an insurer may sometimes take years to run their course (e.g. liabilities for third party bodily injury). An insurer must set aside adequate funds (claims reserves) at the end of each financial year to meet the claims liabilities (outstanding claims liabilities) which may arise in the future.
To help the Insurance Authority to assess the adequacy of the outstanding claims reserves made by insurers, the existing provisions under the Ordinance require an insurer to submit claims statistics in respect of general business for eight development years. The purpose is to help the Insurance Authority to estimate the ultimate cost of losses and hence the amount of outstanding claims liabilities of an insurer. With these statistical data, the Insurance Authority would be able to assess the adequacy of the outstanding claims reserves made by insurers. In case of a shortfall, the Insurance Authority will require the insurer concerned to top it up by either a transfer from its accumulated profit or a fresh capital injection.
The effectiveness of the above monitoring tools hinges on the adequacy of the claims development statistics made available to the Insurance Authority. Recent experience has shown that claims, particularly those relating to liabilities for third party bodily injury, normally take 12 years to run their course. We therefore propose to amend the Ordinance to extend the claims development period from 8 to 12 years.
Conclusion
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With the three proposals mentioned above, the Insurance Companies (Amendment) Bill 1999 will enhance fair competition among market players, enable the Insurance Authority to monitor more effectively the financial position of insurers and increase market transparency. I would like to invite Members to support the Amendment Bill.
Thank you.
End/Wednesday, April 28, 1999
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