PLC Sub-Committee on Subsidiary Legislation of the MPF System

Information Note

Indemnity Insurance


This paper describes the proposals on indemnity insurance, comprising :

  1. coverage of indemnity insurance (paragraph 2 below);

  2. level of indemnity (paragraphs 3, 4 and 5 below);

  3. governed by Hong Kong law (paragraph 6 below);

  4. exclusive for MPF business (paragraph 7 below); and

  5. suppliers of indemnity insurance (paragraph 8 below).



2.We propose that the approved trustee of a scheme should ensure that there is adequate indemnity insurance to cover the scheme for losses in scheme assets, including insurance against misfeasance or other illegal conduct by the approved trustee, other service providers to whom the trustee has delegated his duties, and against losses caused by any other persons. This insurance coverage should be comprehensive and should include protection against the following risks:

  1. Fidelity and Crime:-

    1. cover against fraud or dishonesty - loss resulting from fraudulent or dishonest acts by the trustee or other service providers;

    2. cover against loss inside premises - loss of property (e.g. cash, securities, books of account) from the premises of the trustee, other service providers or financial institutions;

    3. cover against loss of property while in transit - loss of property while it is being transported in the custody of the trustee or other service providers;

    4. cover against forged cheques/securities - loss caused by acting on a cheque or security which is counterfeited, forged, fraudulently altered, lost or stolen; and

    5. cover against computer and funds transfer fraud - loss resulting from computer fraud including data reconstruction costs and theft of funds from fraudulent transfer instructions.

  2. Liability :-

    cover against loss arising from indemnification to the trustee pursuant to scheme rules as permitted under the Ordinance.

Level of Indemnity

3.We propose that the minimum level of indemnity required should be determined based on the market value of the MPF assets under the trustee's management as follows:

MPF Assets
(HK$ million)
Indemnity Insurance Required Level of
(HK$ million)
100 or less

100-300$30 m + 20% of any amount in excess of $100 m

300-500$70 m + 15% of any amount in excess of $300 m

500-1,000$100 m + 10% of any amount in excess of $500 m

1,000-5,000$150 m + 5% of any amount in excess of $1,000 m

5,000-10,000$350 m + 3% of any amount in excess of $5,000 m

>10,000$500 m 500

4.The Authority will continuously review the level of indemnity insurance required and recommend changes in the light of experience.

5.We propose that the maximum deductible should be determined as follows :

  1. if the market value of the total assets under the trustee's management does not exceed HK$1,000,000, HK$100,000;

  2. if the market value of the total assets under the trustee's management exceeds HK$1,000,000, the smaller of HK$500,000 and an amount equivalent to 10 percent of the market value of the scheme assets.

Governed by Hong Kong Law

6.We propose that the policy should be governed by Hong Kong law.

Exclusive for MPF Business

7.We propose that the indemnity insurance policy must be exclusive for MPF business only.

Suppliers of Indemnity Insurance

8.We propose that the supplier of indemnity insurance should either be insurers authorised in Hong Kong, or be overseas insurers with an acceptable credit rating.



9.Our proposal to require trustees to make arrangements for adequate indemnity insurance to cover an MPF scheme will protect scheme assets against losses arising from misfeasance, illegal conduct and other perils. As a matter of fact, indemnity insurance is increasingly utilized by pension plan trustees in other countries such as Australia, Canada, UK and USA.

10.Where a trustee delegates his functions, the trustee remains responsible for the security of scheme assets. The trustee may arrange for all the indemnity insurance required, or may request a service provider to share the indemnity insurance burden by bearing its own level of indemnity cover. In any case, the trustee must ensure that there is appropriate indemnity insurance cover, which meets MPF requirements, for scheme assets handled by him and his service providers.

Level of Indemnity

11.The proposed minimum level of indemnity insurance is similar to retirement scheme indemnity insurance levels available in the USA and UK. It reflects the need to ensure that MPF scheme members are adequately covered in the event of significant losses on the one hand, and the need to ensure that premium costs are not excessive on the other.

12.The proposed cap on the maximum deductible, that is, the first part of the cost of a claim which the insurance policy does not cover, is necessary to ensure that the assets of the scheme asset are as fully protected as possible in the event of MPF scheme claims. The HK$100,000 and HK$500,000 limits are set having regard to the ability of trustees to indemnify the scheme for losses on the one hand, and the need to keep premium costs reasonable on the other.

Governed by Hong Kong Law

13.Incidences which give rise to claims on indemnity insurance are often complicated. Having the policy governed by Hong Kong law will provide greater protection to MPF schemes.

Exclusive for MPF Business

14.The proposal in paragraph 7 above is to provide a greater security to scheme members as scheme assets are protected against loss by indemnity insurance which is made exclusively for MPF business.

Suppliers of Indemnity Insurance

15.Indemnity insurance is a very specialised line of insurance business and many of the underwriters of indemnity insurance are not based in Hong Kong. We therefore propose a flexible approach to accept insurance coverage provided by authorised insurers, who are under the effective regulation of the Insurance Authority, as well as leading insurers in the field meeting an acceptable credit rating.

Mandatory Provident Fund Office
Financial Services Bureau
14 November 1997