## _cr14206

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### Executive summary — sector structure and market characteristics
- Insurance sector in HKSAR described as "mature and diversified."
- Insurance penetration and density in HKSAR are "amongst the top-10 in the world."
- Foreign-owned insurers account for about "72 percent" of total assets as at end-2012.
- Market concentration:
  - Long-term insurance industry is "highly concentrated."
  - General insurance industry market share is "more evenly distributed."
  - All except one of the top-10 insurance groups are foreign-owned.
- Recent trends and growth drivers:
  - Some consolidation in number of insurers; industry saw "strong growth in the last three years."
  - Long-term growth drivers: "increasing affluence and an aging population."
  - General business growth (notably accident and health): "increased awareness of the need to plan for future healthcare needs."
- Vulnerabilities and competitive pressures:
  - Long-term insurers vulnerable to "a protracted period of low interest rates and volatile financial markets."
  - General insurers confronting keen competition.

### Supervisory framework, institutional arrangements and proposed IIA
- Current institutional setup:
  - Insurance Authority (IA) regulates and supervises the insurance industry; supported by the Office of the Commissioner of Insurance (OCI).
  - Intermediaries supervised under a self-regulatory system by three SROs under non-statutory codes approved by the IA: IARB (agents), HKCIB and PIBA (brokers).
  - IA supervises SRO oversight, conducts spot checks and independent inspections of intermediaries, including Continuing Professional Development Program quality assurance.
- Proposed Independent Insurance Authority (IIA) — implementation scheduled in "2015":
  - Establish IIA as a body corporate with explicit legal mandates including:
    - CoB regulation of insurance intermediaries;
    - public education programs to raise financial literacy;
    - thematic research and studies;
    - assisting Secretary for Financial Services and the Treasury in maintaining financial stability.
  - Enhanced legal capacity in inspection, investigation, prosecution, sanctions; licensing and regulation of intermediaries; regulating bancassurance.
  - Establish an independent Insurance Appeals Tribunal; members appointed by the chief executive.
- Suggested further enhancements to IIA:
  - Grant delegated authority to issue enforceable rules via administrative means.
  - Require public disclosure of reasons for removing the head of the agency.
  - Grant clear authority to establish and supervise public disclosures by insurers.
  - Consider eliminating or specifying circumstances under which the Chief Executive in Council (CE) can give directions to the IA and exempt/vary provisions of the Insurance Companies Ordinance (ICO), while respecting the Basic Law.

### Regulatory observance, strengths and legal gaps
- Level of observance:
  - Regulatory regime and IA practices have "a high level of observance of the Insurance Core Principles (ICPs)."
  - IA is "highly regarded by the industry."
- Supervisory strengths:
  - IA staff have a "good understanding of the industry and markets."
  - Established internal procedures and checklists promote "consistency and effectiveness of supervision."
  - Robust supervisory practices compensate for many legal regulatory gaps.
- Key legal and regulatory gaps identified:
  - Extend fit and proper regime to cover "Senior Management and Key Persons in Control Function."
  - Establish clear "definition of control and pre-determined control levels."
  - Update "risk management requirements."
  - Authority to "remove or disqualify persons on fit and proper grounds."
  - Require insurers to implement "contingency plans."
  - Review list of entities exempted from authorization.
  - Clarify "the priority of claims of long-term policyholders."
  - Update guidance notes and better differentiate "minimum requirements from supervisory guidance."

### Group supervision and resources
- Need for a clear, comprehensive regulatory regime for insurance groups covering:
  - Scope of group subject to group-wide supervision.
  - Prudential and market conduct requirements at the group level.
- Recommended actions:
  - Ensure "adequate supervisory resources to effectively supervise insurance groups."
  - Consider legal authority to take measures at the holding company level, aligned with international best practices.

### Prudential regulation, solvency framework and capital adequacy
- IA plans to move towards a risk-based capital (RBC) regime; plan is "welcomed."
- Recommended design and interim measures:
  - RBC should establish clear and consistent valuation standard, including "explicit best estimates of technical provisions and risk margins," and risk-sensitive capital requirements.
  - As a stop-gap, "establish solvency margin requirements for all classes of long-term business."
  - Provide supervisory guidance on insurers’ obligations to meet policyholders’ "reasonable expectation."
  - Pending explicit enterprise risk management requirements, enhance current "dynamic solvency tests" (DST) in the interim.
  - IIA’s proposed mandate on "thematic research and studies" should support macro-prudential analysis and a framework for assessing "systemic risk of insurers."
  - Ensure prudential regime enhancements have "adequate technical support of experienced supervisors and technical specialists."
- Capital adequacy and solvency outcomes (end-2012):
  - IA requires insurers to maintain 150 percent of the relevant amounts (prescribed capital requirement, PCR).
  - Long-term insurers: available capital resources over the PCR of more than 190 percent.
  - General insurers: available capital resources over the PCR of 560 percent.
  - Reinsurers: available capital resources over the PCR of 639 percent.
- Specific recommendations on valuation and capital:
  - Adopt an economic valuation standard consistent between assets and liabilities, responsive to risk factors, providing explicit current estimate and a MOCE, and clearly linked to capital requirement.
  - Include explicit ERM requirements and require insurers to conduct ORSA on both regulatory and economic basis.
  - Extend solvency margin requirements to long-term Class C business and develop a group-wide solvency regime.

### Intermediaries conduct-of-business, consumer protection and PPF
- Transfer of intermediaries supervision:
  - Mission strongly supports transferring supervision of intermediaries to proposed IIA and strengthening CoB requirements in ICO.
  - Rationale: IA oversight of SROs involves "significant duplication of efforts"; industry codes by SROs are "not legally binding."
  - Direct supervision would minimize "potential conflict of interests arising from self-regulation."
- Market conduct and dispute resolution:
  - Predominantly self-regulatory regime; IA and SROs supervise professional conduct.
  - Insurance Claims Complaints Bureau (ICCB) offers alternative dispute resolution; jurisdiction increased to HK$800,000 (2006).
- Planned Policyholder Protection Funds (PPF) legislation (Government aims to introduce bill in 2015):
  - Participants: all authorized direct life and non-life insurers, except reinsurers, captive insurers and wholesale retirement schemes.
  - Coverage: individual policyholders, small and medium enterprises, building owners’ corporations.
  - Compensation: 100 percent for first HK$100,000 of any claim, plus 80 percent of the balance, up to a total compensation limit of HK$1 million.
  - PPF funding: levy on insurers set at 0.07 percent of premium.
  - PPF will facilitate transfer of life policies and accident and health policies with guaranteed renewability.

### Assessment scope and methodology
- Assessment benchmarks: ICPs issued by IAIS in "October 2011, as revised in October 2012."
- Assessment conducted by Su Hoong Chang and Philipp Keller (external experts engaged by the IMF) from "August 29 to September 17, 2013."
- Observance ratings applied: "Observed," "Largely observed," "Partly observed," "Not observed."
- Assessment based solely on laws, regulations and supervisory requirements and practices in place "at the time of the assessment in September 2013."
- Authorities provided a "full and well-written self-assessment"; assessors conducted meetings with insurers and organizations including IARB, PIBA, HKCIB.

### Supervisory coordination and macroprudential surveillance
- Coordination facilitated by Council of Financial Regulators (CFR) and Financial Stability Committee (FSC).
  - CFR: established 2000, chaired by Financial Secretary; includes heads of SFC, HKMA, IA.
  - FSC: established 2000, chaired by Secretary for Financial Services and the Treasury; includes heads of SFC, HKMA, IA.
- Macroprudential surveillance recommendations:
  - Formulate a macro-prudential surveillance framework tailored to insurance sector.
  - Introduce industry-wide standardized scenario testing periodically.
  - Establish structured internal IA processes to identify/monitor emerging risks.
  - Develop more robust systemic-risk indicators for insurers.
  - Review cross-sectoral linkages (bank–insurance, ULPs, mortgage insurers).
  - Include system-wide market conduct and reputational risks.

### Market structure, size, ownership, concentration and distribution channels (key statistics)
- Financial services in HKSAR in 2012:
  - Accounted for 15.9 percent of GDP (value-added approach).
  - Insurance sector accounted for 2.9 percent of GDP.
- Insurer sector size and employment as at end-2012:
  - Assets held by insurers: about HK$1,519 billion (about 9 percent of total assets of the financial sector).
  - Employees in insurance industry: about 65,000 (including agents with principal-agent relationship; excluding bank employees who sell insurance products).
- Global rankings and segmentation:
  - HKSAR ranked fourth for insurance penetration and seventh for insurance density (Swiss Re research).
  - Long-term insurance penetration 11.0; density 4,016 (US$ per capita).
  - Advanced markets (long-term): penetration 5.0; density 2,133.
  - General insurance penetration 1.9; density 703.
  - Advanced markets (general): penetration 3.6; density 1,544.
- Industry consolidation (2007–2012):
  - Total authorized insurers: 178 (2007); 155 (2012) (Inc/Dec: (23)).
  - Long term insurers: 46 (2007); 43 (2012) (Inc/Dec: (3)).
  - General insurers: 95 (2007); 79 (2012) (Inc/Dec: (16)).
  - Reinsurers: 21 (2007); 19 (2012) (Inc/Dec: (2)).
  - Composite reinsurers: 14 (2007); 13 (2012) (Inc/Dec: (1)).
  - Captives: 2 (2007); 1 (2012) (Inc/Dec: (1)).
  - Tied individual agents: 28,892 (2007); 37,608 (2012) (Inc/Dec: 8,716).
  - Agencies (including banks)*: 2,150 (2007); 2,419 (2012) (Inc/Dec: 269).
  - Brokers**: 508 (2007); 604 (2012) (Inc/Dec: 96).
  - Agencies responsible officers and technical representatives: 24,398 (2007); 27,830 (2012).
  - Brokers' chief executives and technical representatives: 6,552 (2007); 8,798 (2012).
- Ownership and concentration detail:
  - Foreign-owned insurers accounted for about 72 percent of total assets.
    - 79 percent of total assets held by long-term insurers.
    - 12 percent held by general insurers.
    - 47 percent held by reinsurers.
  - Foreign branches: 89 (2007); 72 (2012).
  - Long-term top-3 insurers (all foreign-owned) accounted for 46 percent of long-term insurers’ total assets as at end-2012.
  - General insurance top-3 made up 16 percent of total premiums written.
  - Domestic operations of top-10 groups represented 1.5 percent of their global assets while contributing 7.5 percent of the premiums written in 2012.
  - Transfers of assets between parent banks and insurers were immaterial: 0.05 percent of long-term insurance assets (2012) and 3.9 percent of general insurance assets (2012).
- Distribution channels as at end-2012:
  - 37,608 tied individual insurance agents.
  - 2,419 agencies (including 38 banks) with 27,830 responsible officers and technical representatives.
  - 604 brokers with 8,798 chief executives and technical representatives.
  - Distribution of general insurance gross premiums: brokers ~41 percent; agents 21 percent; bancassurance 12 percent; direct sales 13 percent.
  - Long-term in-force ULP sales: banks approx. 15 percent; agents 42 percent; brokers 43 percent.
  - From second quarter 2013, insurers required to submit premiums for new business broken down by distribution channels.

### Hong Kong Mortgage Corporation (HKMC) — role and statistics
- Ownership and regulation:
  - Wholly owned by the HKSAR Government through the Exchange Fund.
  - Regulated by the IA.
- Portfolio and performance:
  - As at end-July 2013, total loan drawdown recorded by HKMC: HK$240 billion.
  - Reported delinquency ratio of loan portfolio: 0.003 percent as at June 2013.
- Product and scheme highlights:
  - SME Financing Guarantee Scheme (SFGS) in January 2011: loan guarantees between 50–70 percent; special concessionary 80 percent product (application period until end-February 2014).
  - Reverse Mortgage Insurance in July 2011.
  - Microfinance scheme launched June 2012.
- Core missions:
  - Enhance banking sector stability via liquidity.
  - Promote wider home ownership.
  - Facilitate growth of debt security and mortgage-backed security markets.

### Assets and liabilities composition (end-2012, In millions of HK$)
- Long-term insurers (total assets 1,329,518 (100)):
  - Total Securities: 856,295 (64)
  - Total investments: 1,204,025 (91)
  - ULP investments: 192,469 (14)
  - Equities: 78,159 (6)
  - Cash & bank balances: 75,097 (6)
  - Reinsurance recoverables: 45,463 (3)
- General insurers (total assets 150,173 (100)):
  - Total Securities: 36,923 (25)
  - Total investments: 87,347 (58)
  - Cash & bank balances: 40,710 (27)
  - Reinsurance recoverables: 12,495 (8)
- Reinsurers (total assets 39,318 (100)):
  - Total Securities: 17,735 (45)
  - Total investments: 27,655 (70)
  - Cash & bank balances: 9,145 (23)
  - Reinsurance recoverables: 4,273 (11)
- Notes:
  - ULP investments constituted 14 percent of total assets for long-term insurers.
  - Long-term insurers’ exposures to equities: 6 percent.
  - IA does not collect market-consistent and amortized cost values of long-term insurers’ holdings; holdings are subject to DST annually.
  - General insurers’ asset profile is very liquid: cash & bank balances 27 percent of total assets as at end-2012.
  - Most corporate securities rated A- or above.
  - Reinsurers: securities 45 percent of assets; receivables and reinsurance receivables 25 percent (increased due to catastrophe provisions from 2011 events).

### Off-balance sheet exposures
- Long-term insurers:
  - Mainly currency forward or exchange rate contracts, guarantees to trust subsidiaries conducting MPF business, capital commitments, operating lease commitments.
  - Notional amount outstanding of OTC off-balance sheet derivatives accounted for less than 1 percent of total assets.
- General insurers:
  - Off-balance mainly capital commitment, operating lease commitment and letters of credit in favor of the IA.
  - Exposure immaterial: 0.6 percent of assets as at end-2012.

### Operating performance and market dynamics — long-term business
- Growth:
  - Double-digit growth rates in the last three years.
  - Traditional policies accounted for two-thirds of market share in 2012.
  - ULP growth slowed to 5.0 percent in 2012.
- Long-term gross written premium (In millions of HK$):
  - 2010: Traditional 105,652; Annuities 1,293; ULP 54,587; Total 161,532.
  - 2011: Traditional 126,451; Annuities 1,505; ULP 60,246; Total 188,202.
  - 2012: Traditional 145,782 (68.8 percent); Annuities 2,951 (1.4 percent); ULP 63,259 (29.8 percent); Total 211,992 (100.0 percent).
  - Inc/Dec (previous year): 16.5 (2011 vs 2010); 12.6 (2012 vs 2011).
- Mainland policyholders and new business (selected figures):
  - 2008: Mainland policies 27,375; Mainland premiums 3,263 (Percent of market premiums 5.4).
  - 2009: Mainland policies 32,823 (19.9); Mainland premiums 2,969 (47.6).
  - 2010: Mainland policies 45,393 (38.3); Mainland premiums 4,382 (44.9).
  - 2011: Mainland policies 65,476 (44.2); Mainland premiums 6,349 (56.2).
  - 2012: Mainland policies 83,393 (27.4); Mainland premiums 9,918 (12.8).
  - Premiums of policies issued to Mainland policyholders accounted for almost 13 percent of new business premiums in 2012.

### General insurance — GWP, business mix, solvency position and risks
- GWP of general insurance industry:
  - Rose by 6 percent in 2012, after almost 15 percent in 2011.
- Major lines (2012, in millions of HK$; retention and percent of total):
  - Motor: Domestic Risks GWP 4,104; Net Premiums 3,435; Retention 83.7; percent of total 9.8.
  - Property: Domestic Risks GWP 7,401; Net Premiums 3,031; Retention 41.0; percent of total 17.7.
  - Liabilities: Domestic Risks GWP 9,164; Net Premiums 6,598; Retention 72.0; percent of total 22.0.
  - Accident & health: Domestic Risks GWP 10,079; Net Premiums 8,365; Retention 83.0; percent of total 24.2.
  - Others: Domestic Risks GWP 6,024; Net Premiums 3,666; Retention 60.9; percent of total 14.4.
  - Sub-total Domestic Risks GWP 36,771; Net Premiums 25,095; Retention 68.2; percent of total 88.1.
  - Foreign Risks: GWP 4,948; Net Premiums 4,398; Retention 88.9; percent of total 11.9.
  - Total: GWP 41,720; Net Premiums 29,493; Retention 70.7; percent of total 100.0.
- Retention ratios:
  - Overall retention for all classes consistently above 70 percent for past three years.
  - Domestic property risks retention: 41 percent.
- Solvency regime and outcomes:
  - ICO sets minimum solvency margin; IA requires 150 percent of relevant amounts (PCR); regime modeled on Solvency I.
  - Table of available capital resources over Minimum Capital Requirements (100% of relevant amount):
    - Long-term insurers: 2010 = 235; 2011 = 274; 2012 = 289.
    - General insurers: 2010 = 717; 2011 = 714; 2012 = 841.
    - Reinsurers: 2010 = 515; 2011 = 336; 2012 = 958.
  - Available capital resources over PCR (150% of relevant amount):
    - Long-term insurers: 2010 = 157; 2011 = 183; 2012 = 193.
    - General insurers: 2010 = 478; 2011 = 476; 2012 = 560.
    - Reinsurers: 2010 = 343; 2011 = 224; 2012 = 639.
- Key risks and vulnerabilities:
  - Long-term insurers: low interest rates and potential pandemic risks; savings products with guarantees particularly affected; IA monitors pandemic exposures through stress testing.
  - General insurers: overcapacity and keen competition leading to low premium rates; vulnerability in employees’ compensation and motor lines; IA requires actuarial certification on adequacy of technical provisions for those classes.
  - Exposures to pandemic and natural catastrophe risks limited by reinsurance protection and predominantly domestic portfolios.

### Preconditions for effective supervision, accounting and actuarial infrastructure
- Macroeconomic and legal infrastructure:
  - HKSAR is a free market economy; ranked first for economic freedom for 19 consecutive years (1995–2013) by the Heritage Foundation.
  - Comprehensive business and financial sector laws; efficient judiciary (ranked fifth for efficiency of legal framework in settling disputes; fifteenth for judicial independence).
- Accounting, actuarial and data:
  - Accounting standards aligned with international standards; HKICPA has more than 33,000 members.
  - Long-term insurers required to have Appointed Actuaries meeting IA criteria.
  - Actuarial Society of Hong Kong (ASHK): some 1,000 members; 75 percent serve in insurance industry.
  - Wide range of economic, financial and social statistics available from Census and Statistics Department and IA.

### Risk management, internal controls, and governance (select findings and recommendations)
- Regulatory guidance:
  - GN10: high-level guidance on risk management systems and internal audit.
  - GN13: risk management for investments and asset-liability management.
  - GN14: outsourcing risk management.
  - GN10 lacks explicit provision covering all material risks.
- Functions and governance:
  - ICO adopts Appointed Actuary system but no explicit mandate for an actuarial function or compliance function.
  - Majority of large insurers have investment, reinsurance and risk management committees; many have CROs reporting to CEO or Risk Committee; majority have head of compliance.
- Recommendations:
  - Widen scope of risk management requirements to cover underwriting, market, credit, operational and liquidity risks at minimum.
  - Establish minimum requirements on risk management systems and key control functions as enforceable rules.
  - Require insurers to have compliance and actuarial functions.

### Crisis response, cross-border coordination and historical example
- 2008 AIG-related events:
  - IA imposed interventionary measures on AIA: daily monitoring and ring-fencing of assets; liaised with 13 supervisors in Asia.
  - IA assumed de facto lead supervisor for AIA; later formally lead regulator and established a supervisory college.
  - IA’s approach assessed as effective.
- Gap and recommendations:
  - No explicit requirement for insurers to maintain recovery or resolution plans.
  - Recommend establishing requirements for insurers to maintain and test contingency plans and procedures for going- and gone-concern situations and to review barriers to internationally coordinated resolutions.

### Selected supervisory priorities and specific recommendations (condensed)
- Delegated authority: consider delegating to IIA authority to issue enforceable rules by administrative means.
- Public disclosure: require disclosure of reasons for dismissal of IA head in ICO.
- Fit and proper: extend coverage to Senior Management and Key Persons in Control Functions.
- Control definition: establish clear definition of "control" and pre-determined control levels.
- Corporate governance: promulgate minimum enforceable governance requirements and expedite GN10 revision.
- Risk management: require compliance and actuarial functions; widen risk management coverage and formalize ERM.
- Group supervision: establish formal group-wide supervision regime; empower IA to obtain information from material non-regulated entities.
- Valuation and RBC: base RBC on an economic valuation standard; ensure consistency between assets and liabilities; require insurers to consider reasonable expectations of participating policyholders.
- Intermediaries and CoB: transfer supervision of intermediaries to IIA; formalize CoB principles in ICO.
- Macroprudential tools: implement standardized scenario testing and systemic-risk indicators; include market conduct and reputational risks.

*Italic: Source — EXECUTIVE SUMMARY and selected chapters (assessment conducted August 29–September 17, 2013) — _cr14206*

### EXECUTIVE SUMMARY ____________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Sector structure and market characteristics
- The insurance sector in HKSAR is described as "mature and diversified."
- Insurance penetration and density in HKSAR are "amongst the top-10 in the world."
- Foreign-owned insurers account for about "72 percent" of total assets as at end-2012.
- Market concentration:
  - The long-term insurance industry is "highly concentrated."
  - The general insurance industry market share is "more evenly distributed."
  - All except one of the top-10 insurance groups are foreign-owned and have much larger consolidated operations compared to their operations in HKSAR.
- Recent trends:
  - Some consolidation in the number of insurers has occurred, yet the industry as a whole has seen "strong growth in the last three years."
  - Growth drivers for long-term business: "increasing affluence and an aging population."
  - Growth drivers for general business (notably accident and health): "increased awareness of the need to plan for future healthcare needs."
- Key vulnerabilities and competitive pressures:
  - Long-term insurers are vulnerable to "a protracted period of low interest rates and volatile financial markets."
  - General insurers are "confronting keen competition in the market."

### Supervisory framework and institutional arrangements
- The Insurance Authority (IA) is responsible for regulating and supervising the insurance industry of the HKSAR and is supported by the Office of the Commissioner of Insurance (OCI), a government department.
- A self-regulatory system is used for supervision of intermediaries. Currently, three self-regulatory organizations (SROs) supervise intermediaries under non-statutory codes approved by the IA.
  - The IARB (set up by the Hong Kong Federation of Insurers) oversees insurance agents.
  - HKCIB and PIBA oversee insurance brokers.
- In practice, the IA supervises SRO oversight and conducts spot checks and independent inspections of intermediaries, including examination and Continuing Professional Development Program quality assurance.

### Proposed Independent Insurance Authority (IIA)
- Authorities proposed establishing an Independent IA (IIA), scheduled to be implemented in "2015."
- Key reform elements proposed for the IIA include:
  - Establishment of the IIA as a body corporate.
  - Explicit legal mandates expanding IIA functions to include:
    - CoB regulation of insurance intermediaries;
    - public education programs to raise financial literacy;
    - thematic research and studies;
    - assisting the Secretary for Financial Services and the Treasury in maintaining financial stability.
  - Enhanced legal capacity in: inspection, investigation, prosecution, sanctions; licensing and regulation of insurance intermediaries; regulating bancassurance.
  - Establishing an independent Insurance Appeals Tribunal to review supervisory decisions; members of the Tribunal will be appointed by the chief executive.
- Suggested further enhancements to the proposed IIA:
  - Grant delegated authority to issue enforceable rules via administrative means.
  - Require public disclosure of the reasons for removing the head of the agency.
  - Grant clear authority to establish and supervise public disclosures by insurers.
  - Consider eliminating or specifying circumstances under which the Chief Executive in Council (CE) can give directions to the IA and exempt/vary provisions of the Insurance Companies Ordinance (ICO), while respecting the Basic Law.

### Regulatory observance, strengths and legal gaps
- The regulatory regime, supported by IA supervisory practices, has "a high level of observance of the Insurance Core Principles (ICPs)."
- The IA is "highly regarded by the industry."
- Supervisory strengths:
  - IA staff have a "good understanding of the industry and markets," enabled by open communication and close dialogue with directors and management of insurers.
  - Established internal procedures and checklists promote the "consistency and effectiveness of supervision."
  - Robust supervisory practices compensate for many identified legal regulatory gaps.
- Key legal and regulatory gaps in the ICO and related guidance:
  - Need to extend the fit and proper regime to cover "Senior Management and Key Persons in Control Function."
  - Need to establish clear "definition of control and pre-determined control levels."
  - Need to update "risk management requirements."
  - Need authority to "remove or disqualify persons on fit and proper grounds."
  - Require insurers to implement "contingency plans."
  - Review the list of entities exempted from authorization.
  - Clarify "the priority of claims of long-term policyholders."
  - Update guidance notes and better differentiate "minimum requirements from supervisory guidance."

### Group supervision and resources
- Given insurance groups present in HKSAR, the IA should formulate and implement a clear and comprehensive regulatory regime for insurance groups, covering:
  - Scope of the group subject to group-wide supervision.
  - Prudential and market conduct requirements at the group level.
- Recommended actions:
  - Ensure "adequate supervisory resources to effectively supervise insurance groups."
  - Consider legal authority to take measures at the level of the holding company, aligned with emerging international best practices.

### Prudential regulation and solvency framework
- The IA plans to move towards a risk-based capital (RBC) regime; this plan is "welcomed."
- Recommended design and interim measures:
  - The RBC regime should establish a clear and consistent valuation standard, including "explicit best estimates of technical provisions and risk margins," and risk-sensitive capital requirements.
  - As a stop-gap, the IA is advised to "establish solvency margin requirements for all classes of long-term business."
  - Provide supervisory guidance on insurers’ obligations to meet policyholders’ "reasonable expectation."
  - Pending explicit enterprise risk management requirements, enhance current "dynamic solvency tests" in the interim.
  - The IIA’s proposed mandate on "thematic research and studies" will support more comprehensive macro-prudential analysis; this could be supported by a framework for assessing the "systemic risk of insurers."
  - Ensure the prudential regime enhancements have "adequate technical support of experienced supervisors and technical specialists."

### Intermediaries conduct-of-business and consumer protection
- The mission strongly supports transferring supervision of intermediaries to the proposed IIA and strengthening CoB requirements in the ICO.
- Rationale:
  - IA oversight of SROs currently involves "significant duplication of efforts."
  - Industry codes and standards issued by SROs are "not legally binding," and SROs are not full-fledged supervisors—constraints that dilute effectiveness.
  - Direct supervision would minimize "potential conflict of interests arising from self-regulation" and align with international best practices.
- Additional recommendation:
  - Formalize existing practices promoting "professional conduct by insurers and intermediaries" to address current regulatory gaps.

### Assessment scope and methodology
- The assessment provides an update since 2003 and is benchmarked against the ICPs issued by the IAIS in "October 2011, as revised in October 2012."
- The assessment was conducted by Su Hoong Chang and Philipp Keller (external experts engaged by the IMF) from "August 29 to September 17, 2013."
- Observance ratings applied: "Observed," "Largely observed," "Partly observed," "Not observed" (definitions reproduced from the assessment).
- The assessment is based solely on laws, regulations and supervisory requirements and practices in place "at the time of the assessment in September 2013."
- The authorities provided a "full and well-written self-assessment" with anonymized supervisory examples; assessors also conducted technical discussions and meetings with insurers and industry/professional organizations including IARB, PIBA, and HKCIB.

*Source: EXECUTIVE SUMMARY (assessment conducted August 29–September 17, 2013).*

### 10.      Supervisory coordination among the regulatory agencies in HKSAR is facilitated by

### _cr14206 - 10.      Supervisory coordination among the regulatory agencies in HKSAR is facilitated by

### Supervisory coordination
- Coordination is facilitated by the Council of Financial Regulators (CFR) and the Financial Stability Committee (FSC).
- CFR:
  - Established in 2000 to minimize gaps or duplication in regulation and supervision of financial institutions.
  - Chaired by the Financial Secretary.
  - Includes heads of SFC, HKMA, and the IA.
  - Serves as a platform to review regulatory and supervisory issues with cross-market implications.
- FSC:
  - Set up in 2000 to monitor the functioning of the financial markets in HKSAR, including the banking, debt, equity, insurance and related markets.
  - Deliberates on issues with possible cross-market and systemic implications.
  - Chaired by the Secretary for Financial Services and the Treasury.
  - Comprises heads of SFC, HKMA, and the IA.

### Market structure and industry performance — overview and recent trends
- Financial services in HKSAR in 2012:
  - Accounted for 15.9 percent of GDP (value-added approach).
  - Insurance sector accounted for 2.9 percent of GDP.
- Insurer sector size and employment as at end-2012:
  - Assets held by insurers: about HK$1,519 billion (about 9 percent of total assets of the financial sector).
  - Employees in insurance industry: about 65,000 (including agents with principal-agent relationship; excluding bank employees who sell insurance products).
- Global rankings and segmentation:
  - Insurance penetration and density among the top-10 in the world.
  - HKSAR ranked fourth for insurance penetration and seventh for insurance density (Swiss Re research).
  - Long-term insurance in HKSAR: penetration 11.0 (percent of GDP) and density 4,016 (US$ per capita).
  - Advanced markets (for comparison): Long-term penetration 5.0 and density 2,133.
  - General insurance in HKSAR: penetration 1.9 and density 703.
  - Advanced markets (general): penetration 3.6 and density 1,544.
- Industry consolidation (2007–2012):
  - Total authorized insurers: 178 in 2007; 155 in 2012 (Inc/Dec: (23)).
  - Long term insurers: 46 in 2007; 43 in 2012 (Inc/Dec: (3)).
  - General insurers: 95 in 2007; 79 in 2012 (Inc/Dec: (16)).
  - Reinsurers: 21 in 2007; 19 in 2012 (Inc/Dec: (2)).
  - Composite reinsurers: 14 in 2007; 13 in 2012 (Inc/Dec: (1)).
  - Captives: 2 in 2007; 1 in 2012 (Inc/Dec: (1)).
  - Tied individual agents: 28,892 in 2007; 37,608 in 2012 (Inc/Dec: 8,716).
  - Agencies (including banks)*: 2,150 in 2007; 2,419 in 2012 (Inc/Dec: 269).
  - Brokers**: 508 in 2007; 604 in 2012 (Inc/Dec: 96).
  - Notes:
    - For agencies, responsible officers and technical representatives: 24,398 in 2007; 27,830 in 2012.
    - Brokers' chief executives and technical representatives: 6,552 in 2007; 8,798 in 2012.

### Ownership and market concentration
- Foreign ownership:
  - Foreign-owned insurers accounted for about 72 percent of total assets in the insurance sector.
    - 79 percent of total assets held by long-term insurers.
    - 12 percent held by general insurers.
    - 47 percent held by reinsurers.
  - No restriction on foreign entrants or ownership in HKSAR insurance market.
  - Foreign branches: 89 in 2007; 72 in 2012.
- Concentration:
  - Long-term industry highly concentrated: top-3 long-term insurers (all foreign-owned) accounted for 46 percent of total assets of long-term insurers as at end-2012.
  - General insurance industry more evenly distributed: top-3 general insurers made up 16 percent of total premiums written.
  - No insurer enjoys a monopolistic position in particular lines of business.
- Top-10 insurance groups:
  - All except one of the top-10 insurance groups are foreign-owned.
  - Domestic operations of top-10 groups represented only 1.5 percent of their global assets while contributing 7.5 percent of the premiums written in 2012.
  - Transfers of assets from parent banks to insurers or increases in insurers’ investments in parent/related banks over last three years were immaterial:
    - 0.05 percent of long-term insurance assets (2012).
    - 3.9 percent of general insurance assets (2012).

### Hong Kong Mortgage Corporation (HKMC)
- Ownership and regulation:
  - Wholly owned by the HKSAR Government through the Exchange Fund.
  - Regulated by the IA.
- Role and recent changes:
  - Pioneered mortgage insurance in HKSAR in 1999.
  - Offers insurance coverage to most mortgage banks in HKSAR.
  - February 2013: revised maximum loan amount insured; lowered maximum loan-to-value ratio (maximum of 90 percent), varies with property value (up to HK$6 million).
- Portfolio and performance:
  - As at end-July 2013, total loan drawdown recorded by HKMC: HK$240 billion.
  - Reported delinquency ratio of loan portfolio: 0.003 percent as at June 2013 (lower than general mortgage market delinquency).
- New products launched since 2011:
  - SME Financing Guarantee Scheme (SFGS) in January 2011:
    - Offers loan guarantees of between 50–70 percent.
    - At government request, rolled out special concessionary 80 percent loan guarantee product (application period until end-February 2014) to assist enterprises.
  - Reverse Mortgage Insurance in July 2011:
    - HKMC insures mortgage banks for shortfalls between property disposal proceeds and outstanding loan balance on reverse mortgages.
    - Estate of the elderly is not liable for any shortfall; estate can recoup surplus if proceeds exceed loan balance.
  - Microfinance scheme launched in June 2012.
- HKMC core missions:
  - Enhancing banking sector stability by offering a reliable source of liquidity.
  - Promoting wider home ownership in HKSAR.
  - Facilitating growth and development of debt security and mortgage-backed security markets in HKSAR.

### Distribution channels
- As at end-2012 distribution capacity:
  - 37,608 tied individual insurance agents.
  - 2,419 agencies (including 38 banks) with 27,830 responsible officers and technical representatives.
  - 604 brokers with 8,798 chief executives and technical representatives.
- Distribution of general insurance gross premiums (stable over past three years):
  - Brokers: about 41 percent.
  - Agents: 21 percent.
  - Bancassurance: 12 percent.
  - Direct sales: 13 percent.
  - Remaining from other channels.
- Long-term business distribution (2012 survey):
  - In-force unit-linked policies (ULPs) sales breakdown:
    - Banks: approximately 15 percent.
    - Agents: 42 percent.
    - Brokers: 43 percent.
- IA reporting change:
  - With effect from second quarter of 2013, insurers required to submit information on premiums for new business with breakdown by distribution channels.

### CEPA concessions impacting insurance market participants
- CEPA (effective January 1, 2004) concessions to insurance market participants in HKSAR include:
  - HKSAR insurer groups formed by re-grouping and strategic mergers may access the Mainland insurance market subject to certain conditions.
  - Capital participation by a HKSAR insurer in a Mainland insurer allowed, subject to maximum limit of 24.9 percent.
  - HKSAR residents with Chinese citizenship may practice in the Mainland after obtaining Mainland professional qualifications in actuarial science without prior approval.
  - HKSAR residents may, after obtaining Mainland insurance qualifications and being employed or appointed by a Mainland insurer, engage in relevant insurance business.
  - Establishment of an examination center in HKSAR for Mainland qualifying examinations for insurance intermediaries.
  - HKSAR insurance agency companies allowed to set up wholly-owned companies in the Mainland to provide insurance agency services for Mainland insurers.
  - Qualified HKSAR insurance brokers may set up wholly-owned insurance agency companies in Guangdong Province (including Shenzhen) on a pilot basis.
- Conditions and eligibility notes:
  - Group access conditions include total assets held by group of over US$ 5 billion; more than 30 years of establishment experience attributable to one HKSAR insurer in the group; and a representative office established in the Mainland for over two years by one HKSAR insurer in the group.
  - Broker/agency eligibility examples include operating for over 10 years in HKSAR; average annual revenue past three years of not less than HK$500,000; total assets of not less than HK$500,000; no serious misconduct or disciplinary action; and representative office in the Mainland for over one year.

### Assets and liabilities — composition as at end-2012 (In millions of HK$)
- Long-term insurers (percent of total in parentheses where provided):
  - Government: 116,523 (9)
  - Semi-Government: 0 (0)
  - Corporate: 496,540 (37)
  - Other securities: 243,232 (18)
  - Total Securities: 856,295 (64)
  - Equities: 78,159 (6)
  - Real estates: 2,005 (0)
  - Cash & bank balances: 75,097 (6)
  - ULP investments: 192,469 (14)
  - Total investments: 1,204,025 (91)
  - Receivables: 22,388 (2)
  - Intra-group receivables: 7,791 (1)
  - Reinsurance recoverables: 45,463 (3)
  - Other assets: 49,851 (4)
  - Total Assets: 1,329,518 (100)
- General insurers:
  - Government: 5,046 (3)
  - Semi-Government: 1,897 (1)
  - Corporate: 23,180 (15)
  - Other securities: 6,800 (5)
  - Total Securities: 36,923 (25)
  - Equities: 7,176 (5)
  - Real estates: 2,539 (2)
  - Cash & bank balances: 40,710 (27)
  - ULP investments: 0 (0)
  - Total investments: 87,347 (58)
  - Receivables: 8,422 (6)
  - Intra-group receivables: 7,354 (5)
  - Reinsurance recoverables: 12,495 (8)
  - Other assets: 34,554 (23)
  - Total Assets: 150,173 (100)
- Reinsurers:
  - Government: 6,509 (17)
  - Semi-Government: 1,281 (3)
  - Corporate: 8,690 (22)
  - Other securities: 1,255 (3)
  - Total Securities: 17,735 (45)
  - Equities: 698 (2)
  - Real estates: 77 (0)
  - Cash & bank balances: 9,145 (23)
  - ULP investments: 0 (0)
  - Total investments: 27,655 (70)
  - Receivables: 5,432 (14)
  - Intra-group receivables: 215 (1)
  - Reinsurance recoverables: 4,273 (11)
  - Other assets: 1,742 (4)
  - Total Assets: 39,318 (100)
- Notes:
  - Investments supporting ULPs constituted 14 percent of total assets for long-term insurers.
  - Long-term insurers’ exposures to equities: 6 percent.
  - IA does not currently collect market-consistent value and amortized costs of long-term insurers’ holdings of securities; these holdings are subject to Dynamic Solvency Testing (DST) annually.
  - General insurers’ asset profile is very liquid: cash & bank balances 27 percent of total assets as at end-2012.
  - Most corporate securities were rated A- or above.
  - Reinsurers: securities accounted for 45 percent of total assets; receivables and reinsurance receivables together 25 percent of assets (increased due to catastrophic loss provisions from 2011 Japan earthquake and Thailand flood).

### Off-balance sheet exposures
- Long-term insurers:
  - Mainly currency forward or exchange rate contracts, guarantees to trust subsidiaries conducting MPF business, capital commitments, operating lease commitments.
  - Notional amount outstanding of OTC off-balance sheet derivatives accounted for less than 1 percent of total assets of long-term insurers.
- General insurers:
  - Off-balance sheet activities mainly capital commitment, operating lease commitment and letters of credit in favor of the IA.
  - Exposure amounts immaterial: 0.6 percent of assets as at end-2012.

### Operating performance and market dynamics
- Long-term industry growth:
  - Recorded double-digit growth rates in the last three years.
  - Growth underpinned by increasing affluence and an aging population.
  - Traditional policies accounted for two-thirds of market share in 2012.
  - ULP growth slowed to 5.0 percent in 2012.
  - Wealth management products viewed as potential growth segment.
- Long-term gross written premium (In millions of HK$):
  - 2010:
    - Traditional: 105,652
    - Annuities: 1,293
    - ULP: 54,587
    - Total: 161,532
  - 2011:
    - Traditional: 126,451
    - Annuities: 1,505
    - ULP: 60,246
    - Total: 188,202
  - 2012:
    - Traditional: 145,782 (68.8 percent of total)
    - Annuities: 2,951 (1.4 percent of total)
    - ULP: 63,259 (29.8 percent of total)
    - Total: 211,992 (100.0 percent)
  - Inc/Dec (previous year) in percent: 16.5 (2011 vs 2010), 12.6 (2012 vs 2011).
- Mainland policyholders and new business (Table 6 highlights):
  - 2008: Mainland policies 27,375; Mainland premiums 3,263 (Percent of market premiums 5.4).
  - 2009: Mainland policies 32,823 (19.9); Mainland premiums 2,969 (47.6) — market total premiums 990,127; premium change -23.3 percent noted for market total.
  - 2010: Mainland policies 45,393 (38.3); Mainland premiums 4,382 (44.9) — market total premiums 1,025,045; market premium 58,780 (26.9).
  - 2011: Mainland policies 65,476 (44.2); Mainland premiums 6,349 (56.2) — market total premiums 1,086,905; market premium 70,256 (19.5).
  - 2012: Mainland policies 83,393 (27.4); Mainland premiums 9,918 (12.8) — market total premiums 1,095,201; market premium 77,565 (10.4).
  - Premiums of policies issued to Mainland policyholders accounted for almost 13 percent of new business premiums in 2012 (more than doubling market share from 2008).
  - Sales of endowment and protection products denominated in Renminbi rising rapidly; policyholders mainly residents in HKSAR.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14206.pdf*

### 26.      Gross written premium (GWP) of the general insurance industry rose by 6 percent in

### _cr14206 - 26.      Gross written premium (GWP) of the general insurance industry rose by 6 percent in

### Gross Written Premium (GWP) and Business Mix
- GWP of the general insurance industry:
  - Rose by 6 percent in 2012, after a surge of almost 15 percent in 2011.
- Dominant classes of business:
  - Accident and health insurance:
    - Accounts for 27 percent of domestic GWP and 70 percent of foreign GWP (HK$3,5 billion).
    - Sustained growth driven by increase in premium rates and enhanced market demand due to increased awareness of healthcare planning.
  - Liability business (including mandatory employees’ compensation insurance):
    - Grew over the past five years, mainly due to increased construction projects and general increase in wage levels.
- Retention ratios:
  - Overall retention ratio for all classes of general insurance consistently above 70 percent for the past three years.
  - Domestic property risks retention: 41 percent.

- Table 7: Hong Kong SAR: Gross Written Premium by Major Lines of Business in 2012––General Business (in millions of HK$) — key figures
  - Motor: Domestic Risks GWP 4,104; Net Premiums 3,435; Retention (In percent) 83.7; percent of total 9.8
  - Property: Domestic Risks GWP 7,401; Net Premiums 3,031; Retention (In percent) 41.0; percent of total 17.7
  - Liabilities: Domestic Risks GWP 9,164; Net Premiums 6,598; Retention (In percent) 72.0; percent of total 22.0
  - Accident & health: Domestic Risks GWP 10,079; Net Premiums 8,365; Retention (In percent) 83.0; percent of total 24.2
  - Others: Domestic Risks GWP 6,024; Net Premiums 3,666; Retention (In percent) 60.9; percent of total 14.4
  - Sub-total: Domestic Risks GWP 36,771; Net Premiums 25,095; Retention (In percent) 68.2; percent of total 88.1
  - Foreign Risks: GWP 4,948; Net Premiums 4,398; Retention (In percent) 88.9; percent of total 11.9
  - Total: GWP 41,720; Net Premiums 29,493; Retention (In percent) 70.7; percent of total 100.0

### Solvency Position
- Regulatory framework:
  - ICO sets minimum solvency margin requirements (the relevant amounts).
  - IA requires insurers to maintain 150 percent of the relevant amounts (prescribed capital requirement, PCR).
  - Solvency regime: rules-based, largely modeled on the European Union’s Solvency I framework.
- End-2012 solvency outcomes:
  - Long-term insurers: available capital resources over the PCR of more than 190 percent.
  - General insurers: available capital resources over the PCR of 560 percent.
  - Reinsurers: available capital resources over the PCR of 639 percent.
- Table 8: Hong Kong SAR: Solvency Position of Domestic Insurers — end-period percentages
  - Available capital resources over Minimum Capital Requirements (100% of relevant amount):
    - Long-term insurers: 2010 = 235; 2011 = 274; 2012 = 289
    - General insurers: 2010 = 717; 2011 = 714; 2012 = 841
    - Reinsurers: 2010 = 515; 2011 = 336; 2012 = 958
  - Available capital resources over PCR (150% of relevant amount):
    - Long-term insurers: 2010 = 157; 2011 = 183; 2012 = 193
    - General insurers: 2010 = 478; 2011 = 476; 2012 = 560
    - Reinsurers: 2010 = 343; 2011 = 224; 2012 = 639

### Key Risks and Vulnerabilities
- Long-term insurers:
  - Vulnerable to low interest rates and potential pandemic risks.
  - Substantial drops in prevailing interest rates negatively impact valuation of long-term liabilities.
  - Prolonged low interest climate particularly affects savings insurance products (especially guaranteed products with long duration), since investment income is the main profit source.
  - IA monitors exposures to pandemic risks through stress testing.
- General insurers:
  - Main risk is overcapacity, compounded by keen competition leading to low premium rates.
  - Risk of compromised underwriting discipline; vulnerable lines include employees’ compensation and motor insurance where aggressive rate cutting may occur.
  - IA measures:
    - Maintains close vigilance and requires actuarial certification on adequacy of technical provisions for employees’ compensation and motor classes.
  - Exposures to pandemic and natural catastrophe risks limited by reinsurance protection and predominantly domestic risk portfolios.

### Preconditions for Effective Insurance Supervision
- Sound and sustainable macroeconomic and financial sector policies:
  - HKSAR is a free market economy; Government policy promotes development of the insurance industry while ensuring up-to-date prudential supervision.
  - HKSAR ranked first in terms of economic freedom for 19 consecutive years (1995–2013) by the Heritage Foundation.
- Well-developed public infrastructure:
  - Comprehensive business and financial sector laws and an efficient judiciary.
  - HKSAR ranked fifth (out of 142) for efficiency of legal framework in settling disputes and fifteenth for judicial independence.
  - Payment, clearing and settlements systems adequately regulated and supervised.
- Accounting, actuarial, and data infrastructure:
  - Accounting standards aligned with international standards; HKICPA has more than 33,000 members.
  - Financial Reporting Council conducts independent investigations into auditing and reporting irregularities.
  - Long-term insurers required to have Appointed Actuaries meeting IA’s prescribed criteria.
    - Actuarial Society of Hong Kong (ASHK): some 1,000 members; 75 percent serve in insurance industry.
    - ASHK issues professional conduct codes, professional standards and actuarial guidance notes; members must fulfill continuous professional development requirements.
  - Wide range of economic, financial and social statistics available from Census and Statistics Department and IA.

### Consumer Protection and Policyholder Protection Funds (PPF)
- Market conduct and dispute resolution:
  - Predominantly self-regulatory regime for market conduct requirements, dispute resolution mechanisms, and policyholder protection funds.
  - IA and relevant SROs supervise professional conduct of insurers and intermediaries.
  - Insurance Claims Complaints Bureau (ICCB) established by HKFI:
    - Alternative dispute resolution for personal insurance claims; all insurers writing personal lines are members.
    - Jurisdiction limit increased from HK$250,000 in 1990 to HK$800,000 in 2006.
    - ICCB decisions binding on insurers; complainants may pursue legal action if unsatisfied.
- Insolvency funds for mandatory insurances:
  - Motor Insurers’ Bureau Insolvency Fund:
    - Available to meet claims for bodily injuries or death arising from motor accidents.
    - Protects, without limit, any final claim not paid due to insurer insolvency.
    - Fund initially built by a 2.5 percent levy on motor policy premiums when established in 1985; levy adjusted to 2 percent from July 1, 2012.
  - Employees Compensation Insurer Insolvency Scheme:
    - Covers employees’ compensation claims.
    - Funded by a levy of 2 percent on member insurers.
- Planned Policyholder Protection Funds (PPF) legislation (Government aims to introduce bill in 2015):
  - Key proposals:
    - All authorized direct life and non-life insurers, except reinsurers, captive insurers and wholesale retirement schemes, required to participate in the PPF; both Schemes will cover direct insurance policies written in HKSAR.
    - PPF will cover individual policyholders, small and medium enterprises, as well as building owners’ corporations.
    - Compensation: 100 percent for the first HK$100,000 of any claim, plus 80 percent of the balance, up to a total compensation limit of HK$1 million.
    - PPF will facilitate transfer of life policies and accident and health policies with guaranteed renewability.
    - PPF funding: levy on insurers set at 0.07 percent of premium.

### Efficient Financial Markets and Market Infrastructure
- Market openness and size:
  - No barriers to market access by foreign businesses; no restrictions on capital flows; no exchange controls.
  - HKSAR was the world’s sixth largest foreign exchange market in terms of turnover in 2010.
  - Hong Kong Exchange market capitalization: US$2,873 billion as at end-May 2013.
- Market development issues for insurers:
  - Some long-term insurers indicate limited supply of longer-term government and corporate securities constrains asset-liability management and affects product design and development.

### Summary of Compliance with Insurance Core Principles (select observations)
- ICPs noted in assessment (examples):
  - ICP 1 (Objectives, Powers and Responsibilities of the Supervisor): Level LO — objectives and responsibilities clearly defined in ICO; IA can issue guidance but not enforceable rules by administrative means; ICO does not explicitly address group supervision objectives and authority.
  - ICP 2 (Supervisor): Level PO — IA appointed by CE; ICO lacks explicit appointment/dismissal criteria; CE has reserve powers (not exercised) that could affect IA autonomy; IA has adequate resources and legal protections.
  - ICP 3 (Information Exchange and Confidentiality Requirements): Level O — IA empowered to exchange information via statutory gateways and cooperation agreements; IA a signatory to IAIS Multilateral MoU.
  - ICP 4 (Licensing): Level O — ICO defines activities requiring authorization; IA issues guidance notes; licensing process includes on-site visits prior to Certificate of Authorization.
  - ICP 5 (Suitability of Persons): Level LO — ICO establishes fit and proper requirements for controllers and directors; fit and proper requirements do not apply to Senior Management (other than MD/CEO) and Key Persons in Control Functions.
  - ICP 6 (Changes in Control and Portfolio Transfers): Level O — IA approves shareholder controllers of locally-incorporated insurers; portfolio transfers subject to court sanction (long-term) or IA approval (general).
  - ICP 7 (Corporate Governance): Level LO — IA guidance note on corporate governance (GN10) largely in line with ICP7; GN10 under review to reflect international best practices; no explicit group governance requirements.

*Source: The Insurance Authority; content as provided in the original IMF chapter excerpt.*

### 8. Risk Management and Internal

### 8. Risk Management and Internal Controls

### Regulatory guidance and scope
- GN10 provides high-level guidance on risk management systems and internal audit function.
- GN13 covers risk management functions relating to insurers’ investments operations and asset liability management.
- GN14 establishes requirements on risk management relating to outsourcing.
- GN10 does not have explicit provision on the establishment of an effective risk management function covering all material risks.

### Actuarial and compliance functions
- The ICO adopts the Appointed Actuary system, but there is no explicit requirement on insurers to establish an effective actuarial function.
- There is no explicit provision on insurers having a compliance function.

### Firm-level risk governance and committees
- A majority of large insurers have investment, reinsurance and risk management committees.
- While there is no requirement to have a dedicated Chief Risk Officer (CRO), a majority of the large insurers have such a function.
- The majority of CROs report to the CEO or to the Risk Committee of the Board of Directors.
- A majority of large insurers have a head of compliance.

*Source: _cr14206 - 8. Risk Management and Internal*

### 1. Objectives, Powers and

### _cr14206 - 1. Objectives, Powers and

### 1. Objectives, Powers and Responsibilities of the Supervisor
- The impending implementation of the proposed IIA regime will enhance the legal capacity and enforcements powers of the IIA, when implemented.
- The IIA will also exercise direct CoB supervision of insurance intermediaries.
- To further improve observance of ICP1, the authorities are advised to:
  - a) Consider delegating to the IIA the authority to issue enforceable rules by administrative means, in accordance with specified legal parameters in the ICO; and
  - b) Establish explicit supervisory objectives for group-wide supervision, supported by adequate legal powers to conduct group-wide supervision.

### 2. Supervisor
- The proposed IIA will have enhanced operational and financial independence, subject to adequate accountability mechanisms including the Process Review Panel and Insurance Appeals Tribunal.
- The authorities are advised to:
  - a) provide for the public disclosure of the reasons for the dismissal of the IA in the ICO; and
  - b) eliminate or specify the circumstances under which the legal authority of the CE to give directions to the IA and to exempt/vary the provisions of the ICO for certain insurers may be exercised, without impinging on the Basic Law.

### 3. Information Exchange and Confidentiality Requirements
- The authorities are advised to empower the IA to obtain information from non-regulated entities of an insurance group and to share such information with relevant authorities subject to appropriate confidentiality safeguards.

### 4. Licensing
- The authorities are advised to consider updating the provision in the ICO on the entities exempted from authorization in line with current international best practices.

### 5. Suitability of Persons
- The authorities are advised to extend the scope of the fit and proper requirements under the ICO to cover Senior Management and Key Persons in Control Functions.

### 6. Changes in Control and Portfolio Transfers
- The authorities are advised to consider:
  - a) Establishing clear definition of “control” and transparent pre-determined control levels under the ICO; and
  - b) Empowering the IA to approve the change of a mutual company to a stock company, or vice versa.

### 7. Corporate Governance
- The authorities are advised to:
  - a) Promulgate minimum corporate governance requirements as enforceable rules (e.g., establishment of Audit Committees and the Board’s oversight of risk management), supplemented by supervisory guidance; and
  - b) Expedite the revision of GN10 aimed at reflecting current international best practices, incorporating explicit requirements on:
    - The role of the Board in setting risk strategy and risk appetite, in line with an insurer’s long-term interests and viability;
    - The Board having adequate powers and resources to be able to discharge its duties fully and effectively;
    - Individual directors to act in the best interest of the insurer and policyholders;
    - Remuneration policy of directors, Key Persons in Control Functions and major risk-taking staff;
    - The Board’s policies and procedures to have effective oversight of Senior Management; and
  - c) Extend the requirements and make specific to insurance groups, in particular relating to the checks and balances between different parts and legal entities of groups, group-internal outsourcing and potential conflicts of interests within a group.

### 8. Risk Management and Internal Controls
- The authorities are advised to:
  - a) Widen the scope of the risk management requirements to cover all key risks (i.e. underwriting, market, credit, operational and liquidity risks, at the minimum);
  - b) Establish minimum requirements on risk management systems and key control functions as enforceable rules;
  - c) Require insurers to have compliance and actuarial functions.
- These requirements could be supplemented by supervisory guidance to facilitate compliance by insurers.

### 9. Supervisory Review and Reporting
- The proposed IIA will have explicit legal authority for on-site inspections and exercise direct CoB supervision of insurers and intermediaries.
- The authorities are advised to:
  - a) Establish a formal and comprehensive group-wide supervision regime. This should include more granular regulatory reporting (e.g., intra-group transactions and risk concentrations) and empowering the IA to obtain information from material non-regulated entities in order to monitor their impact on regulated insurance entities and the group as a whole; and
  - b) Consider the introduction of a formal risk-based supervision framework, which will be supported by the impending implementation of the proposed RBC framework.

### 11. Enforcement
- The authorities’ initiatives in reviewing the current level of penalties and in strengthening the investigation and enforcement powers of the proposed IIA are commendable.
- It is recommended that the authorities empower the IA to require an insurer to replace or restrict the power of Board Members, Senior Management, Key Persons in Control Functions, significant owners and external auditors.

### 12. Winding-up and Exit from the Market
- It is recommended that the authorities consider providing greater legal certainty on the priority of claims for long-term policyholders vis-à-vis the unsecured liabilities attributable to the same insurance fund.

### 13. Reinsurance and Other Forms of Risk Transfer
- It is recommended that the authorities:
  - a) Establish formal regulatory requirements on reinsurance arrangements, including the formulation of reinsurance strategies appropriate to the nature, scale and complexity of their business, sound reinsurance management framework; and prompt documentation and finalization of reinsurance contract;
  - b) Adopt a systematic approach to evaluating the nature of supervision of reinsurers and other counterparties used by insurers;
  - c) Strengthen the requirements on reinsurance with related companies, including –
    - management of liquidity risk, concentration risk, conflicts of interests, contagion risk etc.;
    - assessing the acceptability of reinsurance with related companies based not only according to external ratings but in a more comprehensive manner; and according also to other metrics;
    - introducing risk-based limits on reinsurance exposures to related companies.

### 14. Valuation
- The IA is currently revamping its capital and solvency regime, and a new RBC framework is being developed which will include changes in the valuation of assets and liabilities.
- It is recommended that the proposed RBC framework will be based on an economic valuation standard that:
  - Is consistent between assets and liabilities such that equal or similar cash flows lead to equal or similar values;
  - Is responsive to changes in relevant risk factors (including interest rates, spreads, mortalities, etc.);
  - Provides for an explicit current estimate and a MOCE; and
  - Is clearly linked to the capital requirement i.e. the capital requirement will be defined as a risk measure applied to the change in the value of assets and liabilities over a given time horizon.
- It is also recommended that the IA requires insurers to give due regard to the reasonable expectations of participating policyholders, and how the interests of different policyholder generations and other stakeholders are taken into account – both in a going-concern and distress situation.
- It might be beneficial for the IA and the ASHK to compare the current technical provisions with an economic valuation standard, e.g., a market consistent one, to obtain more insight into the actual level of prudence.

### 15. Investment
- While a principles-based regime as currently implemented for investments is appropriate for the mature insurance market in HKSAR, some additional quantitative restrictions might nevertheless be useful to consider, particularly with respect to the treatment of more risky or concentrated investments under the proposed RBC framework.

### 16. Enterprise Risk Management for Solvency Purposes
- It is recommended that the proposed RBC framework includes explicit ERM requirements applicable to all insurers. This would include the requirement to articulate a risk tolerance statement with associated risk tolerance limits, the ability for insurers to measure risks based on a consistent economic assessment, and an explicit requirement for insurers to conduct an ORSA on both a regulatory and economic basis.
- The requirements should be formulated also for insurance groups and subsidiaries of insurance groups.
- Since the DST that is currently being conducted by long-term insurers contains a number of elements of an ORSA, the authorities may wish to consider extending the DST requirements to bring it more in line with a full ORSA: for example by requiring all insurers and insurance groups to conduct a DST, by requiring multi-year solvency assessment on an economic basis and by linking it more explicitly to an overarching ERM framework.
- The authorities are also encouraged to consider extending the DST to general insurers and to annually review the set of scenarios being used.

### 17. Capital Adequacy
- It is recommended that the authorities:
  - a) Extend the current solvency margin requirements to long-term Class C business.
  - b) Formulate the proposed RBC framework such that the capital requirements:
    - Are clear in the risks that are quantified explicitly and those that are treated through other means.
    - Are consistent with the valuation standard being used for both assets and liabilities.
    - Are based on a consistent underlying methodology for both long-term and general insurance business.
    - Take into consideration the differences of long-term and general insurance business via specific requirements for the quantification of the capital requirements (be it implemented via standard formulae, standard models or internal models) rather than by having different underlying methodologies.
    - Are responsive to a changing risk landscape to which HKSAR insurers are exposed to.
    - Take into account group-risks, e.g. from intra-group transactions.
    - Define intervention levels with clearly associated supervisory actions to be taken.
  - c) Develop a group-wide solvency regime based on a sound and consistent underlying methodological framework (including the valuation standard) and that explicitly addresses risks emanating from group structures, intra-group transactions and from potential limited capital mobility in case of financial stress.
- It is advisable to consider the implementation of a consistent stress testing framework for all insurers that would indicate the resilience of the capital requirements in response to the insurers’ exposure to market wide risks, e.g. via common scenarios that all insurers have to evaluate.
- The impact of the scenarios on the insurers’ balance sheets should be based on a consistent economic valuation standard and take into account potential contagion from groups.
- Such a stress testing framework would also support the IA in its macro-prudential surveillance.

### 18. Intermediaries
- The mission strongly supports the authorities’ initiative to transfer the supervision of intermediaries to the proposed IIA, with a clear legal mandate and adequate legal authority to license, supervise and take proportionate corrective, preventive and enforcement measures.

### 19. Conduct of Business
- The mission welcomes the authorities’ proposal to introduce fundamental CoB principles in the ICO.
- It is also recommended that the authorities formalize existing industry or supervisory practices in promoting professional conduct by insurers and intermediaries to address current regulatory gaps, (e.g., requirements on fair treatment of customers by insurers and intermediaries, including insurers’ marketing, investment, charging and profit distribution strategies for participating policies and ULPs; the need for insurers and intermediaries to handle claims and complaints professionally; and the need for intermediaries to compare and advise customers of different insurance options, such as participating policies vis-à-vis ULPs).
- The implementation of the proposed IIA regime will bring the CoB regime in line with the IAIS standards.

### 20. Public Disclosure
- The authorities are advised to empower the IA in establishing disclosure requirements in line with ICP 20 and to supervise insurers’ compliance with the disclosure requirements.

### 22. Anti-Money Laundering and Combating the Financing of Terrorism
- While the AML/CFT regime is in line with the Financial Action Task Force (FATF) standards in terms of covering life insurance and other investment-related insurance, the authorities are advised to periodically assess the potential ML/FT risk in the general insurance industry to take account of evolving ML/FT typologies and consider whether to apply the FATF standards to general insurance.

### 23. Group-wide Supervision
- It is recommended that the authorities formulate and implement a clear and comprehensive regulatory regime for insurance groups under the ICO.
- Key elements of the regime should cover the scope of the group (including material non-regulated entities) to be subject to group-wide supervision (ICP 9) as well as prudential and market conduct requirements at the group level.
- Going forward, it is advised that the authorities consider empowering the IA to take necessary remedial and enforcement measures at the level of the holding company, in line with emerging international best practices.

*Source: _cr14206 - 1. Objectives, Powers and*

### 24. Macroprudential Surveillance

### 24. Macroprudential Surveillance and Insurance Supervision

### Macroprudential surveillance — recommendations and enhancements
- Authorities are advised to formulate a macro-prudential surveillance framework appropriate to the nature, scale and complexity of the insurance sector.
- Enhancements could be made by:
  - a) Requiring insurers to conduct periodic comprehensive industry-wide standardized scenario testing exercises, to provide the IA with an additional tool for assessing the build-up of industry-wide risks/ vulnerabilities;
  - b) Establishing clear and structured internal processes for identifying, assessing, monitoring and reporting on emerging risks in the industry;
  - c) Developing more robust indicators for assessing systemic risk of insurers;
  - d) Reviewing whether the current mainly sector-based approaches of the sectoral supervisors is adequately complemented by consideration of cross-sectoral linkages e.g., bancassurance, ULPs and mortgage insurers; and
  - e) Inclusion of risks arising from system-wide market conduct issues, including reputational risks.

### Cross-border cooperation and crisis management — recommendations
- It is recommended that the authorities:
  - a) Establish clear requirements for insurers to maintain and test contingency plans and procedures for use in a going- and gone-concern situations; and
  - b) Regularly review the existence of practical barriers to efficient and internationally coordinated resolutions and collaborate with the relevant supervisor to resolve these issues.

### IA practice and current state (summary of findings)
- The IA regularly performs qualitative and quantitative analysis on market performance and trends using regulatory information and quarterly statistics; it conducts thematic reviews where specific issues arise.
- The IA participates in the CFR and the FSC and meets HKMA and SFC regularly to discuss macroeconomic developments, market vulnerabilities and financial stability issues.
- The IA is not the home regulator for any globally systematically important insurers and has not identified any domestically systematically important insurers.
- There is no formal process to assess the potential systemic importance of insurers.

### Key policy recommendations (macroprudential focus)
- Formulate a macro-prudential surveillance framework tailored to the insurance sector.
- Introduce industry-wide standardized scenario testing on a periodic basis.
- Establish structured internal IA processes to identify/monitor emerging risks.
- Develop more robust systemic-risk indicators for the insurer sector.
- Review cross-sectoral linkages (bank–insurance, ULPs, mortgage insurers) in sectoral supervisory approaches.
- Include system-wide market conduct and reputational risks in surveillance.

*Italic: Source — _cr14206 - 24. Macroprudential Surveillance — PEOPLE’S REPUBLIC OF CHINA––HONG KONG SPECIAL ADMINISTRATIVE REGION, INTERNATIONAL MONETARY FUND*

### 2008. When problems related to AIG surfaced, there was substantial anxiety amongst

### _cr14206 - 2008. When problems related to AIG surfaced, there was substantial anxiety amongst

### Crisis response and cross-border coordination
- Event: 2008 problems related to AIG led to a sudden increase in policy surrenders and enquiries from policyholders of AIA in HKSAR and other jurisdictions in Asia.
- IA immediate actions:
  - Imposed interventionary measures on AIA, including daily monitoring of its financial and cash-flow position and ring-fencing of its assets.
  - Maintained close liaison with the other 13 supervisors in Asia through direct telephone calls and group teleconferences.
  - Assumed the role of the de facto lead supervisor for AIA and later formally assumed the role of lead regulator for AIA and established a supervisory college.
- Liaison and crisis management:
  - Liaison continued on a regular basis until the IA formally assumed lead regulator responsibilities and established a supervisory college.
  - The IA’s approach and procedures were assessed as effective in managing the crisis.
- Public communication:
  - The IA would make appropriate public announcements on a timely basis to sustain market stability.
  - The IA would notify college members/appropriate authorities of other affected jurisdictions about its plans for public communication, share the details of the announcements prior to public release, and coordinate similar actions in other jurisdictions.

### Assessment and recommendations
- Assessment: Largely observed.
- Comments:
  - The IA has maintained positive relationships with foreign supervisors, contributing to effective, coordinated cross-border crisis resolution.
  - The IA demonstrated openness and commitment in working collaboratively with relevant foreign home and host supervisors during the global financial crisis in 2008.
  - The IA has been reviewing and discussing common tools for managing a cross-border financial crisis with relevant supervisory colleges.
  - Gap: There is currently no explicit requirement for insurers to maintain recovery or resolution plans.
- Recommendations:
  - a) Establish clear requirements for insurers to maintain and test contingency plans and procedures for use in a going- and gone-concern situations; and
  - b) Regularly review the existence of practical barriers to efficient and internationally coordinated resolutions and collaborate with the relevant supervisor to resolve these issues.

### Appendix I. Status of Implementation of 2003 FSAP Recommendations — selected items
- Define more precisely the status, resources, staffing and accountability of the IA, with independent funding arrangement for insurance supervision. Consider introducing an equitable assessment system so the industry funds the costs of insurance supervision.
  - Status: It is proposed to establish an IIA. The IIA would be self-financed with income streams from license fees and service charges on insurers and intermediaries, and a market levy based on the premiums of all insurance policies.
  - The authorities are currently finalizing the legislative amendments, with a view to establishing the IIA in 2015.
- Ensure early implementation of the Guidance Note on Corporate Governance, accompanied with proper training and dissemination of the spirit underlying its provisions.
  - Status: The Guidance Note on Corporate Governance was issued and became effective on 1 September 2003 and insurers comply with this GN.
- Regulations should be reviewed to ensure that long-term assets matching long-term liabilities are clearly identified, and can be secured if necessary.
  - Status: Under section 22/22A of the ICO, long-term insurers are required to maintain separate funds for long-term businesses in respect of Classes G, H and all other classes.
  - Planned amendment: Amendments will be made to section 22 of the ICO to require every insurer to maintain separate insurance funds for each class of long-term business.
- Strengthen appointed actuaries framework; require actuaries to be members in good standing of the ASHK.
  - Status: An appointed Actuary (AA) is required to meet prescribed qualifications under the Insurance Companies (Actuaries’ Qualifications) Regulations or other qualifications acceptable to the IA under section 15(1)(b) of ICO. They are also required to observe PS1 under Insurance Companies (Actuaries’ Standards) Regulation.
  - Planned amendment: Amendments will be made to the ICO requiring prior approval of AAs for all insurers incorporated in HKSAR (and prior notification for insurers incorporated outside HKSAR but the IIA will be empowered to object the appointment) under the proposed IIA regime.
  - ASHK status: ASHK is now considering to a change of its status into a statutory body.
- Set up capital requirements for Class G and H business.
  - Status: The Guidance Note on the Reserve Provision for Class G of Long-term Business (GN7) imposes reserving and solvency requirement on Class G business with 99 percent confidence level (based on stochastic modeling). It provides a prudent reserving requirement with adequate buffer embedded in the reserves.
  - Class H businesses have been converted to a trust arrangement in 2011. The authorities will review the remaining ORSO business as part of the RBC framework reform.
- Insurance companies should be required to disclose the extent to which, and the purpose for which derivatives are used.
  - Status: All insurers are required to report to the IA annually the extent of their exposure to derivatives and the objectives of holding such derivatives. Insurers use derivatives mostly for hedging purposes.
- The IA or other competent body should have the power and responsibility to supervise market conduct in the insurance market, and carry out active oversight of the insurance sector SROs.
  - Status: The IA has put in place a number of measures on market conduct and policyholder protection, e.g. prohibition of offering gifts for life products, new measures on the sale of ULPs. The IA has been maintaining active oversight of the self-regulatory bodies. The self-regulatory system will be abolished upon the establishment of the IIA.
- The financial reporting requirements should be considered for harmonization so that all life insurance companies file statutory reports on the same accounting and reporting basis. Companies should be required to file their audited annual financial reports in period less than six months after the end of the year.
  - Status: All insurers report their financial statements under the Hong Kong Financial Reporting Standards issued by the HKICPA.
  - Status: All insurers are required to file the annual Hong Kong business return within four months after the financial year end.
  - Planned amendment: Amendment will be made to the ICO to accelerate the submission of audited annual financial reports to four months.

*PEOPLE’S REPUBLIC OF CHINA––HONG KONG SPECIAL ADMINISTRATIVE REGION, INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14206.pdf_