The government confirmed that it would proceed with a long-awaited plan to establish a safety net for policyholders when insurance companies collapse.
Secretary for Financial Services and the Treasury Professor Chan Ka-keung said a consultation showed support for the plan to set up the Policyholders' Protection Fund (PPF). If approved by lawmakers, the fund would be launched in 2013 or 2014.
'The PPF will be a safety net for policyholders when an insurer becomes insolvent. It will enhance the stability and competitiveness of our insurance industry,' Chan said.
Under the proposed scheme, all insurers in Hong Kong would have to pay a levy to build up a safety net of more than HK$1.2 billion for the city's policyholders in the event of an insurance company's collapse.
The government in 2003 first consulted the market about setting up the scheme but shelved the idea due to strong opposition from the industry. But a three-month public consultation last March attracted support.
In Hong Kong, both banks and brokers have compensation funds to pay consumers in case a lender or firm collapses but there is no such arrangement for insurers.
The PPF would comprise two compensation funds - one covering life insurance policyholders and the other for general insurance policies. The original proposals covered only individuals but the government would now also cover small and medium-sized enterprises.
'We will keep the administrative procedures user-friendly to minimise the administrative cost,'' Chan said.
The proposals require all insurance companies to pay 0.07 per cent of premium income into the two compensation funds - worth HK$1.2 billion for the life sector and HK$75 million for general insurers - over 15 years.
Should policyholders need to settle claims immediately after an insurer collapses, the compensation funds would pay out.
Liquidators would also use part of the funds to finance another insurer to take over existing policies and to maintain policyholder benefits.
If no other insurers were willing to take over the policies, holders could get the cash value back from the funds.
A proposed HK$1 million cap means 90 per cent of life insurance policies and 96 per cent of general insurance policies can be fully covered.
The city's total insurance premium income stood at HK$207 billion in 2010, up 33 per cent from 2006.