For information on
13 April 1999




This paper informs Members of the Panel of a proposal to amend the Insurance Companies Ordinance ("Ordinance") to :

  1. strengthen the regulation of Lloyd's;

  2. accelerate the submission of financial information by insurers relating to their Hong Kong general business from 6 to 4 months; and

  3. extend the number of development years for the submission of claims statistics by insurers relating to their Hong Kong general business from 8 years to 12 years.

2. A copy of the Insurance Companies (Amendment) Bill 1999 is at Annex A.

(A) Strengthening the Regulation of Lloyd's


Constitution of Lloyd's

3. Lloyd's is an association of underwriters established during the 17th century in London, United Kingdom. It is not a conventional insurance company which underwrites insurance business as a single entity, but rather a market place for corporate and individual sole traders who underwrite business as competing syndicates. The syndicates are managed by professional underwriters who accept risks on their behalf.

4. Until 1994, membership of Lloyd's had been restricted to individuals who are liable to the full extent of their personal wealth for their own share of risks accepted. Each underwriting member of Lloyd's is responsible for its own losses arising from the insurance contracts that he or she has underwritten, but is not responsible for the losses of other underwriting members.

Recent Development of Lloyd's

5. During recent years, Lloyd's has encountered unprecedented financial troubles and litigations arising from huge underwriting losses incurred from policies written during the late eighties into and including 1992. Most of these losses relate to latent diseases, health hazards and remedial actions taken to control or compensate for the damages caused by pollution. These problems have made Lloyd's the subject of media attention. There were many adverse comments about its financial strength and internal management. The international insurance community has also been very concerned about the future of Lloyd's.

6. In response, Lloyd's has implemented a Reconstruction and Renewal Plan to restore its position as the world's leading and a most reputable insurance market. A separately capitalized reinsurance company called Equitas has been set up and authorized by the Department of Trade and Industry in the United Kingdom ("DTI") to reinsure all pre-1993 liabilities of members of Lloyd's. To raise new capital, Lloyd's began to admit corporate members for the first time in 1994. The admission of corporate members has not only strengthened Lloyd's capital base but also increased the security funds established within Lloyd's, as corporate members are required to pay a higher rate than individual members.

7. The annual audited global business return of Lloyd's as at 31 December 1997 shows that Lloyd's has become profitable again since 1993. The performance of Equitas in running off Lloyd's pre-1993's liabilities was also considered satisfactory by the Government Actuary's Department of the United Kingdom. Very good ratings were assigned to Lloyd's by both A.M. Best and Standard & Poor's Insurance Ratings in 1997 and 1998

Regulatory System of Lloyd's in the United Kingdom

8. Lloyd's has all along been subject to self-regulation in the United Kingdom. The Lloyd's Act 1982 of the United Kingdom was introduced to formalise the self-regulatory system for the purposes of protecting policy holders and upholding the good reputation and effective operation of the Lloyd's market. Under this Act, the Council of Lloyd's was created and conferred rule-making and disciplinary powers. In addition to self-regulation, Lloyd's has also been placed under the supervision by the DTI (functions taken over by HM Treasury since 1998). It is required to demonstrate its solvency annually to the DTI and is subject to the latter's interventionary powers. Under the Financial Services and Market Bill of the United Kingdom issued in July 1998 for consultation, Lloyd's will be placed under the supervision of the newly created Financial Services Authority.

Regulatory System of Lloyd's in Hong Kong

9. Like many countries, Hong Kong has made special provisions for the regulation of Lloyd's business, in recognition of its uniqueness, history and international reputation. The special provisions relating to Lloyd's are laid down in Part VII of the Ordinance as at Annex B. The requirements to be complied with by Lloyd's are simply the appointment of an authorized representative in Hong Kong, the deposit of a copy of the statement which it submits to the U.K. authority annually, and payment of an authorization fee annually, whereas all other authorized insurers are subject to the provisions of the Ordinance in full, including the maintenance of local assets, submission of local business returns and the interventionary powers of the Insurance Authority ("IA").

10. Concerns have been raised by the insurance industry on the preferential treatment Lloyd's is currently receiving under the Ordinance. These concerns are further strengthened by the financial troubles of Lloyd's in recent years and the admission of corporate members whose liabilities are limited. It is therefore questionable whether the existing regulatory regime for Lloyd's is adequate for the protection of the interests of Hong Kong policy holders and consistent with our policy of providing a level playing field for all market players.


11. We propose to amend the Ordinance to strengthen the regulation of Lloyd's in Hong Kong. Under the proposal, Lloyd's will be subject to the regulatory requirements applicable to other authorised insurers including requirements on solvency margin, local assets, fit and proper management, financial reporting and regulation of its insurance agents, with suitable modifications in recognition of its unique mode of operation and accounting system. It will also be subject to the interventionary powers of the IA. This new regulatory regime is in line with the practice in other countries.

(B) Acceleration of Submission of Financial Information


12. Under the Ordinance, an insurer is required to submit to the IA financial information relating to its Hong Kong general business in specified forms, i.e. the Hong Kong General Business Return ("HKGBR") and the Statement of Assets and Liabilities ("SAL"), as well as financial information relating to its entire global business within 6 months from the end of its financial year. The HKGBR contains information on the underwriting performance of an insurer in Hong Kong while the SAL shows the assets maintained by it in Hong Kong to match its Hong Kong liabilities. Such information is important for the IA to appraise and monitor the local operations and financial strength of insurers.

13. In the light of the current rapidly changing business environment, the existing time limit of 6 months for submission of the above information is considered excessive. It prevents the IA from undertaking appraisal and, if necessary, taking remedial actions in a more timely manner to protect the interests of the Hong Kong policy holders. For example, the IA may require the topping up of local assets if the amount fell below the specified level. The delay in the submission of financial information also causes delay in the issue of industry statistics. The early release of industry statistics is important for the transparency and systemic stability of the market.


14. We propose to amend the Ordinance to accelerate the submission of financial information relating to the Hong Kong general business of an insurer from 6 to 4 months. It may not be practicable to further accelerate the submission having regard to the constraints imposed by the insurers' accounting practices and the capability of the auditing profession to cope with such a requirement. The time limit of 4 months is considered appropriate and in line with the reporting requirement applicable to banks incorporated in Hong Kong.

15. Having consulted the insurance industry, we do not propose to accelerate the submission of accounts and statements relating to the global business of an insurer, which will remain 6 months. The industry is of the view that these accounts and statements normally take a longer time to be produced as they require consolidation of financial information relating to the world-wide operations of an insurer. To require submission within 4 months would be very difficult, if not impossible, for many insurers, particularly those incorporated overseas and having operations in many different parts of the world.

(C) Provision of More Claims Development Statistics


16. An insurer may incur claims liabilities which take many years to run their course (e.g. claims liabilities for third party bodily injuries). To meet its future obligations, an insurer must set aside at the end of each financial year sufficient funds (claims reserves) to cover the amount of claims liabilities payable in the future (outstanding claims liabilities). The adequacy of the claims reserves is therefore important for the protection of policy holders as it affects the claims paying ability of the insurer. The IA needs to be satisfied that the claims reserves set aside by an insurer is adequate, as part of his assessment of the solvency position of the insurer, to meet its outstanding claims liabilities.

17. To facilitate the IA to undertake the above assessment, an insurer is required under the Ordinance to submit claims statistics in respect of different classes of general business for 8 development years in the HKGBR. This is to provide the IA with statistical data for projecting the ultimate cost of losses and therefore the amount of outstanding claims liabilities to be payable by an insurer. The projected amount of outstanding claims liabilities will then be compared with the amount of claims reserves set aside by an insurer to test its adequacy. Where there is a shortfall in the amount of claims reserves, the IA will require the insurer to top it up either by a transfer from its accumulated profits or a fresh capital injection.

18. The effectiveness of the above monitoring tool hinges on the sufficiency of the claims development statistics made available to the IA. Recent experience has shown that outstanding claims liabilities, particularly those relating to third party bodily injuries, normally take 12 years to be fully developed. A claims development history of 8 years is therefore considered inadequate to provide a reliable basis for the purpose of assessing the adequacy of the claims reserves made by insurers.


19. We propose to amend the Ordinance to extend the claims development period from 8 to 12 years.


20. The Insurance Advisory Committee, the Hong Kong Federation of Insurers, the Actuarial Society of Hong Kong, the Hong Kong Society of Accountants ("HKSA") as well as Lloyd's have been consulted on the proposals and have indicated their support. The HKSA has also advised that the accelerated submission of financial information, for which auditing is required, will not present any undue difficulty to the auditing profession.


21. The major provisions of the Bill are as follows :

  1. Clause 2 amends section 20 to shorten the period for the submission of financial information relating to Hong Kong general business from 6 to 4 months;

  2. Clause 4 introduces new sections 50A to 50F to lay down a new regulatory framework for Lloyd's and its members. New sections 50A to 50E require Lloyd's to comply with requirements on solvency margin, fit and proper management, financial reporting, local assets and regulation of insurance agents respectively. New section 50F extends the interventionary powers of the IA to cover Lloyd's and its members;

  3. Clause 6 amends Part 8 of the Third Schedule to introduce new Forms 6 to 9 for insurers to submit claims statistics relating to their Hong Kong general business. New forms 6 to 9, which extend the claims development period from 8 to 12 years, are contained in the Schedule to the Bill;

  4. Clause 7 amends the Fourth Schedule and Form A thereof, which is designed for the appointment of controllers by authorized insurers, to accommodate the appointment of authorized representative by Lloyd's; and

  5. Clause 9 and Clause 10 provide for the transitional arrangements to allow time for Lloyd's and the insurers to prepare for compliance with the new requirements.


22. The legislative timetable will be -

Publication in the Gazette

16 April 1999
First Reading and Commencement of
the Second Reading Debate

28 April 1999
Resumption of Second Reading Debate,
committee stage and Third Reading
to be notified

Financial Services Bureau
April 1999