HK$1m safety net per policy for Hong Kong policyholders in case of insurer collapse
City’s insurers to pay 0.07 per cent of income from premiums for two compensation funds
Insurance policyholders could get protection coverage of up to HK$1 million (US$130,000) if their insurance company collapses, after the Hong Kong government started the legislative procedure to introduce a long-awaited safety net for them, officials told lawmakers on Monday.
The lawmakers, however, questioned if the proposed law would provide sufficient protection to the more than 10 million policyholders in the city.
The Policy Holder’s Protection Scheme Bill will be submitted to lawmakers for discussion during the coming 2018-19 legislative session, Joan Hung, the principal assistant secretary for financial services and the treasury, told lawmakers in a regular monthly meeting of the Panel on Financial Affairs on Monday.
If approved, all insurers in Hong Kong will have to pay 0.07 per cent of their income from premiums for all policies to establish two compensation funds. One, worth HK$1.2 billion, will be for the life insurance sector, and the other, at HK$75 million, will be for general insurers and will be established over 15 years. In case the funds are used up by a big compensation need, the levy will be increased to 1 per cent.
The maximum cover will be HK$1 million per policy, either for life insurance or general insurance, and it will cover individuals as well as small and medium-sized companies.
“Although Hong Kong has a very robust regulatory system, and there have only been a handful of insolvencies involving small non-life insurers in the past two decades, the 2008 international financial crisis highlighted the need for a more comprehensive compensation fund, for protecting policy holders with a view to strengthening their confidence in the insurance market,” said Eddie Cheung, the deputy secretary for financial services and the treasury.
“It would be important to have the safety net to cover SMEs, as many small restaurants and other smaller companies will have problems if they cannot get insurance in case their insurance company collapses,” said Cheung.
The government first consulted the market about setting up the scheme in 2003, but shelved the idea because of strong opposition from the industry. But a three-month public consultation in 2011 attracted much support. Then in June last year, the government set up the Insurance Authority, which will handle these protection funds once lawmakers approve the bill, said Cheung.
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In Hong Kong, banks and brokers have compensation funds to pay consumers in case a lender or company collapses, but there is no such arrangement for insurers.
Several lawmakers questioned if the coverage provided was sufficient. Cheung said the current cover matched international standards. The proposed contribution of 1 per cent in case of big claims is in line with a similar levy in Singapore, and lower than contributions in Canada (1.5 per cent) and US (2 per cent).
“If we set the coverage higher, the levy will need to be higher and that might hurt the competitiveness of Hong Kong insurance companies,” said Cheung.