Exploring the Insurance Landscape of Hong Kong
The insurance market in Hong Kong has seen several interesting years of development, particularly in the past 12 months as the recently formed Insurance Authority has begun to flex its power.
Antony Sassi and Carmel Green shed some light on the emerging trajectory of the insurance and reinsurance space in Hong Kong, with insights on how the sector has developed in light of the introduction of the new regulator, the COVID-19 pandemic and civil protests.
What have been the main trends in the insurance and reinsurance markets over the last 12 months?
COVID-19 has inevitably continued to have a major impact on the insurance industry over the past 12 months. In the financial lines sector, we have seen increased exposure for directors and officers as businesses have buckled under ever-growing financial pressures in what has been a challenging economic environment. Insolvencies attract shareholder and creditor scrutiny of management decisions, leaving directors vulnerable to claims. We have seen an uptick in these types of actions. D&O insurers have started to revisit the need for insolvency exclusions in their standard policy forms in order to mitigate potential exposure.
Cyberattacks remain on the rise and COVID-19 has put cybersecurity firmly under the microscope. The global move to remote working, which began as an enforced measure in 2020, has become the norm for many. Greater online – and offsite – activity has presented opportunities for cyber criminals to exploit weakened IT infrastructures and prey on people’s vulnerabilities. 2021 was a breakout year for ransomware attacks as sophisticated phishing scams hit more businesses than ever before. Companies with comprehensive cyber insurance have been rewarded, and those without are taking urgent action to plug this gap in cover.
We have also seen a rising demand for crypto insurance. Financial market uncertainty has led to increased demand for crypto products and insureds have looked to hedge associated risks with appropriate insurance. The US continues to lead in this sector, although supply continues to lag behind demand for these products. Understandably, insurers are cautious about pumping capacity into a market that is little understood, given the dearth of data within the crypto sphere and ongoing uncertainty about the regulatory environment.
Insolvencies attract shareholder and creditor scrutiny of management decisions, leaving directors vulnerable to claims.
Another key trend in the insurance market (and others) has been the increased focus on engaging with ESG matters. Insurers are not alone in wanting to promote sustainable, environmentally friendly and inclusive messaging both internally and externally; employees and clients now expect this from corporates as a matter of course. This change in mindset has impacted on the risks that insurers are prepared to underwrite and at what cost. With the fast development of Insurtech, traditional insurers have also been pushed to consider the social sustainability of their products and services.
Against the above, we have seen several changes in the underwriting environment. Insurers have been keen to advance their digital strategies, with use of predictive scoring, pricing and risk selection tools. This has, however, attracted the attention of regulators who are looking to establish clear, ethical rules on the use of big data and AI. There has been a push to ensure that underwriting decisions made by computer and machine learning systems do not contain elements of systematic bias and result in unfair outcomes.
In Hong Kong, what is a contract of insurance for the purposes of the law and regulation? In what ways does this differ from a contract of reinsurance?
There is no regulatory definition of an insurance contract in Hong Kong, but the concept is the same as under English law: it is the provision of an indemnity/benefit by one party (the insurer) to another (the insured) if an uncertain adverse event occurs, in return for consideration (premium).
For general insurance, the policyholder must have an insurable interest in the subject of the policy (i.e. some economic stake that insurance is capable of protecting) at the time the claim is made.
Although there is no requirement for insurance contracts to be in writing, it is universal practice. The Insurance Ordinance (Cap. 41) (IO) is Hong Kong’s primary insurance regulation and lists the different types of insurance business in Schedule 1. Insurance contracts are classified by reference to those classes.
Insurance and reinsurance contracts are subject to the same governing principles. With a contract of reinsurance, the reinsurer is underwriting the risk of another insurer, and so the contract is with the insurer, not the insured. A reinsurance contract might also contain some additional provisions, for example, to the effect that the reinsurer shall have a “right to associate”, or “claims control”, so that it can closely manage the underlying claim and the potential exposure under the underlying insurance contracts. This will usually depend on how much of the risk is ceded to the reinsurer.
Insurers have been keen to advance their digital strategies, with use of predictive scoring, pricing and risk selection tools.
There are also some regulatory obligations which apply to insurance contracts, but which do not apply to reinsurance contracts, such as in relation to issuing policies.
How are insurers regulated in Hong Kong?
Since 2017, the Insurance Authority (IA) has been responsible for administering the IO, which provides the legal framework for the regulation of insurers and insurance intermediaries (agents and brokers) in Hong Kong. The IA is a statutory body independent of both the government and the insurance industry. Prior to the IA, the Office of the Commissioner of Insurance regulated the industry for over 30 years. The IA has been given increased powers modelled on those given to the Securities and Futures Commission (SFC) under the SFO, which regulates licensed corporations.
The IO was amended in 2019, whereupon the IA became the sole regulator of all insurance intermediaries in Hong Kong, having taken over from the three self-regulatory bodies – namely the IARB, the CIB and the PIBA.
Pursuant to the IO, any person carrying out regulated insurance activities in Hong Kong must be licensed by the IA. Those who are not authorised or exempt risk imprisonment (for individuals) and/or a fine. The IA can inspect, investigate and discipline insurers and intermediaries where it deems a breach has occurred, or if it considers that business has been conducted which is against policyholders’ or the public interest. Insurers and intermediaries in Hong Kong therefore need to ensure they have sufficient internal policies and processes in place, including how to deal with a “knock at the door” by the IA, and maintain proper record keeping.
It is perhaps fair to say the IA has been fairly slow to exercise its powers since it was first established. However, in the last 12 months, we have seen this gradually start to change, with the IA bringing more cases before the Insurance Appeals Tribunal (IAT), a statutory and independent body, and a greater focus on enforcement.
What are some of the most common insurance compliance issues your clients face?
Our clients are long-established multinational insurers, all of whom have substantial experience of adhering to a range of regulatory requirements across a multitude of jurisdictions, and of dealing with local regulators.
This said, the creation of the IA and the enactment of the IO in Hong Kong is very recent (in relative terms) and sweeping changes of this nature inevitably create a degree of upheaval for those involved. Insurers’ legal teams have had to familiarise themselves with the new legislation and ensure that their existing policies and procedures comply. Aspects of their business which previously did not warrant scrutiny may do so now. And, of course, the legislation is new and untested, meaning all involved (including the IA) are still in the process of understanding its scope and limitations, where legislation cannot and will not cater for every situation. We are regularly called upon to support our clients as the industry continues to navigate the legislation and understand the extent of its requirements and parameters.
It is perhaps fair to say the IA has been fairly slow to exercise its powers since it was first established. However, in the last 12 months, we have seen this gradually start to change.
What may be the consequences of an organisation failing to comply with regulatory requirements, and how can your firm help prevent this outcome?
Following an investigation, the IA has a wide range of disciplinary actions available to it if an authorised insurer is found guilty of misconduct or an individual is found to be not fit and proper to hold a directorship or controller position. Penalties range from a reprimand (either private or public) to more serious sanctions including a fine of up to HK $10 million (or three times the profit gained or loss avoided as a result of the infringement) or suspension/revocation of the insurer’s or individual’s licence to carry on insurance business.
Before the IA takes action, the authorised insurer or individual can make written or oral representations and can appeal the IA’s decisions to the IAT.
In the last 12 months, the IA has taken disciplinary action against insurers and brokers arising from a range of failings. However, the majority of cases have been matters of serious misconduct e.g. rogue individuals acting alone and for personal gain. The IA has likely been purposefully selective about the cases it has pursued, seeking to make an example of the worst offenders.
Misconduct is obviously not something that we or our clients can prevent absolutely. However, we can support our insurer and broker clients to ensure they have the correct infrastructure in place to help catch individual behaviours that fall foul of the rules. For other types of (unintentional) breaches, we can support them in developing policies and procedures that reflect the requirements of the regulations to ensure that all involved are aware of their respective obligations and are operating in compliance with the rules. If breaches occur, we can advise on how to manage and respond to the enquiry and the benefits of early and voluntary cooperation.
What are some of the most complex cases your firm has worked on in recent times?
We have always maintained a wide practice area. However, certain local and global events over the last few years have generated some highly complex and sensitive instructions which have been a privilege to work on.
The Hong Kong protests, which took place throughout 2019, are a key example. We provided specialist support to a number of key insurers in respect of a ream of large property damage and business interruption claims after a range of corporations and business suffered significant losses during the protests. These claims required us to consider (among other things) the application and interpretation of terrorism exclusions, a policy provision which is rarely engaged. In circumstances where the protests were the first of its kind in Hong Kong, and given the lack of legal authority on the issues arising, we were able to provide highly specialised legal support and innovative commercial solutions to assist our insurer clients. Our work led us to team up with various esteemed London insurance QCs, which demonstrates the magnitude and significance of these claims.
The creation of the IA and the enactment of the IO in Hong Kong is very recent (in relative terms) and sweeping changes of this nature inevitably create a degree of upheaval for those involved.
In the cyber risks sphere, over the last two years we have advised on policy coverage in respect of some of the largest, most high-profile ransomware attacks affecting HK companies. We also act as the regional breach solution for a major leading international insurer. Our product, ReSecure, which is written into the insured’s cyber policy, includes a dedicated 24/7 hotline which an insured can call in the event of a data breach to obtain immediate crisis response. We provide breach coordination and legal advice, including as to data privacy issues, regulatory reporting and notification to data subjects; we also partner with digital forensic and PR firms to deal with the full suite of technical and PR aspects arising from the breach. And, of course, we work with the insurer to comply with the necessary reporting requirements under the policy.
What key trends do you foresee in the insurance and reinsurance markets over the next 12 months?
While COVID-19 is still present, we can expect it to have a reduced impact on the insurance market in the coming 12 months. Despite a likely lingering feeling of uncertainty for the remainder of this year, financial commentators – including Deloitte – are reporting accelerated growth in Asia. With lockdowns and international travel restrictions gradually lifting, demand for personal accident and health insurance, which makes up the largest part of general insurance in Hong Kong, is set to rise.
In the liability market, we expect to see the most growth in cyber insurance. As mentioned above, cyber policies have come into their own in the past two years and demand is continuing to rise. We also expect the trend for increased financial fraud cases and risks of insolvency to continue, which keep up demand for D&O insurance.
A key interesting area of growth for the D&O / IPO insurance market is in the form of SPACs, or “blank cheque” companies. These are newly formed shell corporations listed on a stock exchange for the sole purpose of acquiring or merging with one or more target private operating companies. This enables the private company to go public more quickly, without going through the traditional IPO process. As an IPO will usually give rise to a “change in risk”, it is usually appropriate to take out a specific IPO / POSI policy to protect against the specific risks associated with IPO transactions, serving to ring-fence the exposure away from a company’s conventional D&O programme.
Given the low cost of SPACs, we can expect their popularity to rise and for Asian exchanges to want in on the action. While a SPAC listing is similar to a reverse merger, which we know from experience have capacity to generate claims, there are key differences from a risk evaluation perspective. In an ever-hardening market, SPAC IPO D&O insurance is hard to come by and carries hefty premiums. This is increasingly flagged as a risk in prospectuses, especially by the larger sponsors. High premiums are of course common to new products where insurers lack sufficient historical data to assess risks.
There are also considerations specific to this product which stand to affect premium: the “blank cheque” quality is difficult to model in underwriting; there is uncertainty of where the trust’s capital will be deployed, and carriers may not be able to issue long-term policies in accordance with reinsurance treaties. Underwriters placing these risks can therefore be expected to give due consideration to a range of factors, including: (i) the background and reputation of the sponsor; (ii) the amount of capital being raised; (iii) the target class of business; (iv) the location of the target business; (v) the specifics provided in the registration filings, and (vi) the quality of the team of professionals advising on the transaction.
Antony Sassi, Managing Partner
Carmel Green, Partner
38/F One Taikoo Place, 979 King’s Road, Quarry Bay, Hong Kong
Tel: +852 2216-7101 | +852 2216-7112
12 Marina Boulevard, #38-04 Marina Bay Financial Centre, Tower 3, Singapore 018982
Tel: +65 6422-3000
Fax: +65 6422-3099
Antony Sassi is managing partner at RPC’s Hong Kong Asia practice and a leading litigator in the Hong Kong market, with a focus on defending professionals and D&Os relating to various tortious and contractual claims and advising more broadly on financial lines related matters. He is President of the HK Insurance Law Association and sits on the Law Society Insurance Committee, and has handled some of the largest claims in Asia over the last few years against various professionals. He has also been ranked in Band 1 for leading individuals in Chambers Asia since 2011.
Carmel Green is an insurance lawyer specialising in financial lines and professional indemnity matters, with particular experience in handling large-scale insurance-related disputes and advisory work. She is regularly instructed by insurers to review, approve and draft insurance policy wordings across various lines of insurance business. Carmel has been ranked as a leading individual in Chambers Asia since 2017.
RPC is a global corporate and insurance law firm founded in London in 1898. It has been named Law Firm of the Year three times since 2014, and Best Legal Adviser every year since 2009. RPC’s team of 750 is recognised as industry-leading in insurance, retail, media, tech and numerous others.