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LCQ1: Employees' Compensation Insurance Residual Scheme

     Following is a question by the Hon Wong Ting-kwong and a reply by the Secretary for Labour and Welfare, Mr Matthew Cheung Kin-chung, in the Legislative Council today (May 2):


     Some members of the trade have relayed to me that at present, quite a number of small and medium-sized enterprises (SMEs), particularly those in the transport industry, etc, face the problems of surging and high insurance premiums, or difficulties in taking out insurance polices when they procure employees' compensation insurance (labour insurance policies).  They have pointed out that the insurance companies which they used all along ceased to underwrite labour insurance policies due to cost of risks, and other insurance companies also refuse to do so or charge extremely high premium rates; moreover, the number of insurance companies providing labour insurance policies on the market is not enough.  They have also pointed out that even though the existing Employees' Compensation Insurance Residual Scheme (ECIRS) might provide the ultimate channel for employers to take out labour insurance policies, employers still cannot afford the insurance premiums, and these problems have significantly increased their operating costs, rendering SMEs difficult to survive.  In this connection, will the Government inform this Council:

(a) whether the authorities will consider relaxing the application criteria of ECIRS, and lowering its premium rates; if they will, of the details; if not, the reasons for that;

(b) whether the authorities will consider afresh the setting up of a central employees' compensation insurance scheme; if they will, of the details; if not, the reasons for that; and

(c) whether the authorities will launch other specific measures to assist SME employers in dealing with difficulties in taking out labour insurance policies and the problem of high premium rates; if they will, of the details; if not, the reasons for that?



     According to section 40 of the Employees' Compensation Ordinance, all employers are required to take out employees' compensation insurance policies to cover their liabilities under the Ordinance and common law.  Otherwise, they shall not employ any employee in any employment.  At present, there are around 50 insurance companies which can underwrite employees' compensation insurance.  Each insurance company will, taking into account the market conditions and the company's own underwriting guidelines, decide to underwrite employees' compensation insurance for different industries.  Insurance companies will also determine premium rates on the basis of risk of underwriting the policies, which is mainly the rate of accident and the amount of claim.  However, statistics of the Office of the Commissioner of Insurance (OCI) have shown underwriting losses in the business of employees' compensation insurance for many years.  This is mainly due to fierce competition in the market.  Coupled with huge insurance payouts for work injuries, and deliberate misstatement or under-reporting by individual employers in respect of the number of employees, salaries and types of work (for example, misstating high-risk technical staff as low-risk clerical staff), underwriting losses have continued to be registered for many years.  Therefore, insurance companies underwriting this type of insurance have to adjust upwards the premium rate to a more reasonable and sustainable level.

     My reply to the three parts of the question raised by Hon Wong Ting-kwong is set out below:

(a) The Employees' Compensation Insurance Residual Scheme (ECIRS) was set up in 2007.  Its purpose is to provide assistance to employers who encounter difficulties in taking out employees' compensation insurance through offering them the necessary insurance cover.  Employers can participate in the ECIRS if they meet the following criteria:

(i) Employers have been declined insurance cover by at least three insurers underwriting employees' compensation business, provided that the non-availability of insurance is not by reason of the employer failing to pay premiums due or meet statutory requirements on occupational health and safety imposed as a condition of the grant of insurance; or

(ii) Though insurance covers are offered to the employers, the premium rates quoted by insurers are 30% over the corresponding premium benchmark rates of the relevant high-risk industries specified by the Scheme.

     If individual employers encounter difficulties in taking out insurance but do not meet the above criteria, the ECIRS Bureau and the Hong Kong Federation of Insurers (HKFI) will also try their best to offer assistance.

     As regards the insurance premiums, a discount and loading mechanism is in place to adjust the rates to be offered according to factors like the occupational safety and health performance and risk preventive measures adopted by employers.  This discount and loading mechanism helps encourage employers adopt good occupational safety and health measures to reduce risks at work.

     The ECIRS Bureau has drawn up a list of high risk-industries according to relevant information and set the benchmark premium rates of these industries through independent actuaries.  The ECIRS Bureau will also review these benchmark rates annually.

     Past experiences have shown that the ECIRS has been operating smoothly.  Since its establishment on May 1, 2007 to the end of March 2012, the ECIRS Bureau has received 218 applications.  Of these, 50 have been provided employees' compensation insurance cover by the ECIRS (Note 1); 64 are being vetted; two have been withdrawn by the employers; two have been refused as the covers sought do not fall under the category of employees' compensation insurance; and the remaining 100 applications have eventually been offered employees' compensation insurance cover by other insurance companies.

     The ECIRS Bureau will improve the operation of the Scheme through practical experience, and will provide proactive assistance to employers encountering difficulties in taking out employees' compensation insurance.

(b) Currently, Hong Kong's employees' compensation system is based mainly on the Employees' Compensation Ordinance which adopts the system that individual employers are responsible for their own employees.  An employer must, in accordance with the requirements of the relevant legislative provisions, take out employees' compensation insurance with an authorised insurance company.  This is to ensure the employer's ability to pay employees who are injured at work the compensation as stipulated under the Employees' Compensation Ordinance as well as the compensation awarded by court under common law.  The existing system also encourages employers to adopt proactive measures to prevent work accidents, as the premium payable is directly related to their occupational safety and health performance and the measures adopted to reduce risks at work.

     At the same time, in order to address public concern over the possible non-availability of employees' compensation insurance cover and the rising premium costs for certain high-risk industries, the ECIRS was launched by the insurance industry in May 2007.  The ECIRS acts as a market of last resort to provide assistance to employers who encounter difficulties in acquiring employees' compensation insurance cover.

     We think that the existing employees' compensation system, after years of continuous improvements and enhancements, can offer comprehensive and suitable protection to employees.  As the establishment of a central employees' compensation insurance system will have far-reaching impact on employers, employees and the insurance industry, we should handle the matter with great caution.  Moreover, the current private sector mode of operation is functioning well and the relevant system can better suit Hong Kong's current situation.  Therefore, no drastic changes should be made.  We will continue to maintain close contact with the relevant stakeholders and institutions in order to ensure better improvement of the current system.

(c) As regards assisting SME employers to tackle the difficulties in taking out employees' compensation insurance and the high premiums problem, the premium level of insurance companies is determined by adjustments in the free market.  Section 26(3A) of the Insurance Companies Ordinance stipulates that the OCI cannot intervene in the premium rates of insurance companies.  However, we fully understand the impact of increase in employees' compensation insurance premiums on SME employers.  We understand that the HKFI, which represents insurance companies, has all long maintained close contact with representatives or trade associations of different trades and industries to listen to their views.  Moreover, the HKFI has striven to enhance their services for the insured, which include the establishment of the ECIRS in 2007.  The ECIRS offers assistance to employers who encounter difficulties in taking out employees' compensation insurance through providing them with the necessary insurance cover.  The HKFI and the ECIRS Bureau will, where necessary, have meetings with SME employers and representatives.  For instance, they have frequent contacts with the scaffolding, cleaning and recycling industries over the past year so as to strengthen communication among various parties and listen to the demands of different sectors.

     For example, the transport/logistics, cleaning and recycling industries have earlier on reflected to the Government and the insurance industry that they had encountered difficulties in taking out employees' compensation insurance. After frank and in-depth discussions among the various parties, the ECIRS Bureau agreed to issue short-term insurance policies ranging from three to six months, so as to enable the sectors to have more time to discuss with individual insurance companies on the policy terms and the premium rates.  Thereafter, the ECIRS Bureau has also designated these industries as high-risk industries with effect from April 1, 2012 and appointed independent actuaries to determine the benchmark premium rates, so as to facilitate the employers of these industries to take out insurance policies and estimate the cost of insurance premiums.

     Moreover, the HKFI and the ECIRS Bureau will strengthen the communication with the High Risk Group employer representatives with a view to better understanding the operation of the industries concerned.  Through enhanced communication, improvements to occupational safety and risk management as well as the keeping of complete salaries records by employers, insurers can more accurately assess the risks concerned for setting the premium rates.

     I would like to stress that the relevant government bureaux and departments will continue to actively co-operate with the industry to combat illegal activities such as insurance frauds and champerty.  The Labour Department will also improve occupational safety awareness and level and prevent accidents through adopting the three-pronged approach of enforcement, training and publicity.  Through these efforts, the number of insurance claims will hopefully be reduced, thus giving premium rates room for downward adjustment.

Note 1: Among the 50 companies offered insurance cover by the ECIRB Bureau, 34 are from the scaffolding industry, nine from the recycling industries, two from the cleaning/pesticide industry, one from the transport industry, one from the construction engineering industry, one from the catering industry, one from the car repairing industry and one from the trade industry.

Ends/Wednesday, May 2, 2012
Issued at HKT 13:00


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