The Hong Kong Federation of Insurers (HKFI) has stated its opposition to a government proposal to establish policy-holder compensation funds. The government has proposed setting up two funds that would pay up to $1 million in claims to individual policy holders should their insurance firm collapse. Proponents of the funds say the proposals will help Hong Kong keep pace with international trends and improve policy-holder protection. A consultation period will end in March. But HKFI chairman Edward Lau Wan-kong said the proposed funds would require increases in the premiums paid by policy holders, whose insurance bills have been growing. Similar programmes implemented elsewhere suggest that policy holders would need to pay an amount equal to 1 per cent to 2 per cent of their insurance premiums to finance the funds. 'The HKFI is concerned about the cost implications of the proposed compensation arrangement. If the government decides to proceed, policy holders will need to pay a levy to set up the fund. This will mean they have to pay more money for insurance,' Mr Lau said. 'This is not desirable as insurance premiums have already gone up substantially over the past few years because of the threat of the terrorist attacks and Sars. This is not the right time to add more burdens on policy holders.' Mr Lau also argued that such funds could create a potential moral hazard by inspiring insurers to adopt riskier business models. 'Such disadvantages may outweigh the funds' benefits,' he said, adding that increased vigilance by insurance regulators could protect policy holders. 'We have to ensure there is no cut-throat price competition in the industry and that all insurers have a sound financial standing,' Mr Lau said. 'To offer policy holders protection after their insurers have collapsed is not the best way to protect their interests. The best protection is preventive measures to make sure the insurance companies do not fail.' Commissioner of Insurance Richard Yuen Ming-fai said he understood insurer concerns, but would also need to weigh the interests of policy holders. 'The insurance industry is expanding and more and more people are buying insurance products. We have to set up a safety net for them,' Mr Yuen said. 'We will have measures to prevent insurance firms collapsing. But we also need to have measures to protect policy holders.'