Plan to expand safety net to SMEs has insurers fuming
Insurance executives have become increasingly worried about a government proposal to expand a safety net to corporate policyholders in the event an insurer collapses.
Having the safety net in place is good for policyholders and is in line with international practice, but industry insiders said the current proposal had undergone some changes, which may add risks to the whole industry.
The government last month announced that following positive public consultation on the proposal it would start the legislative process to set up the Policyholders' Protection Fund. The fund would be launched either next year or in 2014.
The scheme means all insurance companies in Hong Kong will have to pay a levy to build up two compensation funds - one for life insurance policyholders and another for general insurance policyholders.
The funds will pay policyholders up to HK$1 million each in the event of an insurance company's collapse.
Insurance insiders said that when the government collected comments about the proposed scheme last year it appeared to cover only individual policyholders. But the government last month said the scheme would cover small- and medium-sized enterprises.
The expansion is of particular concern to the industry. If the safety net covers only individual policyholders the fund will only receive claims from individual products such as accident, household content or director liability.
If the scheme is expanded to cover SMEs, the risk profile will increase substantially as it will cover such things as product liability, business interruption and natural catastrophes.
An industry insider said if drug or food companies had product liabilities cover, an unforeseen event such as a mass food poisoning may result in thousands of claims.
If the insurance company providing the cover in such a situation went bankrupt, the Policyholders' Protection Fund may not be sufficient to cover all claims.
Under the current proposal, general insurers will pay 0.07 per cent of premium income for 15 years to establish HK$75 million for general insurers. As each policyholder can claim up to HK$1 million, this means the general insurance protection fund could cover only 75 cases.
Another concern for the general insurer is that an overseas company could set up an SME in Hong Kong to buy insurance products not available in their home market.
For example, a Thai company that could not get flood cover in their own country could set up an SME to buy the type of protection in Hong Kong. If the Hong Kong general insurance company collapsed, then Policyholders' Protection Fund would have to pay for the policyholders in Thailand.
This effectively exposes the Hong Kong insurance sector to overseas risks.
If the fund runs out of money, it would require general insurers to pay an increased levy, costs it may pass on to customers. Some general insurers now plan to lobby the government to rethink the inclusion of SMEs into the safety net.
Watch this space.