At a meeting of Hong Kong’s Panel on Financial Affairs on Monday, plans were outlined to set up a policyholders’ compensation fund.
The aim is to “better protect policyholders’ interests, maintain market stability in case of insurer insolvency and enhance public confidence and competitiveness of the insurance industry”, the Research Office of the Legislative Council Secretariat stated.
In the past two decades, Hong Kong has only experienced a handful of insolvencies involving small non-life insurers. However, the note stated that the lack of a protection scheme “contrasts with many developed economies”.
The Research Office highlighted the Singapore and UK compensation funds as examples of similar schemes. Singapore introduced its Policy Owners’ Protection (PPF) Scheme in 1986, while the UK Financial Services Compensation Scheme (FSCS) was launched in 2001.
Life versus non-life
Hong Kong’s Policyholders’ Protection Scheme (PPS) would cover life and non-life insurers. The life fund covers all direct life policies written in the special administrative region; including term life, whole life, annuities, investment linked and permanent disability policies.
All authorised direct life and non-insurers would be mandated to participate in the scheme. However, insurers domiciled in other jurisdictions with similar protection schemes may be exempted. This would be determined by the PPS government body on a case-by-case basis.
The Policyholders’ Protection Scheme Bill will be debated in the 2018/19 legislative session.
How will it be funded?
The Hong Kong Government has proposed a “progressive” funding model, under which an initial target fund will be built up through a moderate levy on insurance premiums. There would also be the option to impose a higher levy as necessary after an insolvency.
An initial target of HK$1.2bn (£111m, $153m, €124m) has been identified for the life fund, while the non-life fund will be HK$75m. The pots will be built up over a 15-year period.
The initial levy rate for both schemes will be set at 0.07% of the applicable premiums, to be paid by the insurers.
If the funds in the scheme are not enough to cover the cost of an insolvency, the PPS would be able to borrow the money from a third party and introduce a “stepped up” levy to rebuild the fund.
In order to strike a balance between the cost and benefit of PPS and concerns that insurers might become more aggressive in pricing and investment strategies, a compensation limit has been proposed.
This would limit compensation to 100% for the first HK$100,000 of any claim, plus 80% of the balance up to a total HK$1m.
For life insurance, compensation would be applied on a per-policy basis or per-life bases for group life policies. For non-life it would be on a per-claim basis.
The current push to introduce the PPS is not the first time that Hong Kong has considered rolling out a lifeboat scheme. The idea was first conceived in the early 2000s and a public consultation was commissioned.
Feedback from industry, however, highlighted concerns around the impact on premiums and the risk that insurers might become more aggressive, increasing the potential for insurers to become insolvent. The plans were subsequently abandoned.