White Collar

Hong Kong must tighten rules for insurers after China watchdog’s warnings

Soon-to-be-established industry authority must prioritise greater regulation. Hong Kong’s reputation as a financial centre is at stake.

PUBLISHED : Monday, 25 April, 2016, 3:13pm
UPDATED : Monday, 25 April, 2016, 4:14pm

Imagine 10 or 20 years from now — those Chinese mainlanders who purchased some 24 per cent of the Hong Kong life insurance policies last year find the returns are much lower than they expected; it may well bring a flood of complaints.

This risks Hong Kong’s reputation as an international financial centre. The soon-to-be-established Insurance Authority must take the issue on as a priority.

It also explains why China’s insurance regulator warned mainlanders buying life policies in Hong Kong to be aware of doing so.

On Friday the China Insurance Regulatory Commission (CIRC) said on its website that life policies bought in Hong Kong would not be protected by mainland law. The regulator also asked the mainland public to be aware of that Hong Kong has no regulations on dividend or cash value. It said China has tighter regulation in these areas.

The warning came after mainlanders spent HK$31.6 billion, or 24.2 per cent of the total new premiums of all life policies sold in Hong Kong last year, up from just 6 per cent in 2009. Mainlanders like to come to Hong Kong to buy US- and Hong Kong-dollar policies to escape the exchange loss after the yuan weakened.

In light of this, Hong Kong must put in place measures to prevent any policy misselling or misunderstanding of its insurance industry.

Some analysts said China’s industry watchdog’s shot across the bows was an attempt to curb capital outflows from the county and help its own insurers compete with their Hong Kong rivals.

Others said mainlanders do not really understand Hong Kong insurance regulation and the path may be being laid for future complaints about misselling.

Prior to the CIRC warnings, many mainland media had already pointed out that some Hong Kong insurers have given an excessively rosy picture about the predicted returns, which they said may be misleading.

In some cases, policies claimed their projected annual returns could be up to 6 or 7 per cent a year.

Do you know how much is paid in commission to insurance agents who sell life insurance products in Hong Kong? Very high. Subtracting those payments and other costs, it would represent about 3 per cent per year in investment returns.

It means the insurance company would need to make a 9 to 10 per cent return annually to meet its projected 6 to 7 per cent annual return. It should noted that many overseas policies can only deliver a 4 to 5 per cent return per cent. Some even less.

Does this constitute misselling? The insurers would say no because they would cite the figures as projections and not a guaranteed return.

However, we are not quiet sure if the mainlanders who spent the HK$31.6 billion understand that.

On the mainland, insurers are restricted in how far they can make such projections and they must present some reserve and give reasonable grounds to back up their claims.

British and Australian insurers face similar restrictions.

Hong Kong is a free market and there are no limits in this area on insurers. More importantly, it may be because Hong Kong has lagged behind international practice that we do not have an independent insurance authority yet.

The government department of Office of Commissioner of Insurance has focused on insurers’ registration and capital requirement. It has yet has much to do in terms of the regulation of how those companies calculate return projections.

The Independent Insurance Authority will be set up in the second half of this year. I hope the regulator pays attention to this return-projection issues.

Insurers may sell fewer policies as a result but this would prevent misselling or misunderstandings and safeguard the reputation of Hong Kong’s insurance sector.