Insurance Law Update: 2015 Review and 2016 Forecast

To get an overview of the most significant insurance law-related developments in 2015 and a prediction of how the landscape may shift in 2016, Hong Kong Lawyer reached out to Patrick Perry, an experienced insurance practitioner at Clyde & Co in Hong Kong.

2015 Review

With the enactment of the Insurance Companies (Amendment) Ordinance 2015 (the “Amendment Ordinance”) and the further implementation of the Closer Economic Partnership Arrangement between mainland China and Hong Kong (“CEPA”), the year 2015 has been a very busy year for the insurance industry in Hong Kong.  Some of the most significant developments include the following.

Establishment of an Independent Regulator

The enactment of the Amendment Ordinance on 10 July 2015 by the Legislative Council marks a significant milestone in the insurance regulatory landscape.  The Independent Insurance Authority (the “IIA”) will be established to replace the existing Office of the Commissioner of Insurance (the “OCI”). With investigatory, enforcement and disciplinary powers similar to those of the Securities and Futures Commission, this independent, non-governmental statutory body is set to bring Hong Kong in line with the regulation of other major insurance jurisdictions.  The IIA is also set to implement a statutory licensing regime to replace the existing self-regulatory system for insurance intermediaries. The new direct licensing regime will have rule-making powers, investigation and disciplinary powers over the insurance intermediaries. The process is expected to be complete by the end of 2017 or early 2018.

Enhanced Consumer Protection

To better protect policyholders, increase the industry's competitiveness in the region and strengthen market stability, the government has placed an increased emphasis on enhancing consumer protection.  The Fair Treatment of Customers concept was promoted by the OCI and Guidance Notes 15 and 16 were issued in 2014 and 2015 in relation to Underwriting Unit-linked and Non Unit-linked life policies. The Guidance Notes adopted a holistic 'cradle-to-grave' supervisory approach with enhanced disclosure requirements for greater protection on consumers.

The government has also been working with the insurance industry to establish a Policyholders' Protection Fund. The compensation fund aims to boost consumer confidence with individual and SME policyholders against insurer insolvency.

Last but not least, the government consulted the public on the implementation of a risk-based capital (“RBC”) framework for the Hong Kong insurance industry. The proposed framework aims to increase market stability and reduce the risk of insurers' insolvency by making capital requirements more sensitive or proportional to the level of risk that insurance companies are bearing.  Despite mixed views on some of the technical aspects, the RBC framework received general support from the industry and will be developed in four phrases over the course of 2016 and 2017.

The CEPA Agreement

Another major development in the industry is the implementation of the Agreement between the Mainland and Hong Kong on Achieving Basic Liberalisation of Trade in Services in Guangdong under the CEPA framework, which came into effect in March 2015. The CEPA framework signifies new opportunities for Hong Kong insurers to expand into the Chinese market through institutional set-up or capital injection.  It was also agreed under the CEPA framework that multi-channel distribution of insurance products and business operation between Hong Kong and China should be promoted.  The extent to which the CEPA framework will be utilised by the industry does remain, however, uncertain.

2016 Forecast

In addition to the upcoming developments in relation to the Amended Ordinance set out above, the following will also be relevant to Insurers.

Enactment of the Contracts (Rights of Third Parties) Ordinance

The Contracts (Rights of Third Parties) Ordinance (the “New Ordinance”) comes into force on 1 January 2016 with far-reaching impact.  The New Ordinance abolished the long-established common law doctrine of privity of contract, which provided that a party cannot acquire or enforce any right under a contract if he is not a party to it.  Under the New Ordinance, a third party may, in certain circumstances, enforce a contract to which it is not a party.  This will be an area of particular interest for insurers, especially in relation to life insurance, as a life insurance policy may now be enforced directly by an interested third party. It is possible to exclude the New Ordinance's effect if the contracting parties agree to not benefit third parties and we expect to see carve-out provision to this effect being implemented widely by the industry going forward.

Protection of Personal Data against Transfer Outside of Hong Kong

The industry should continue to be aware of the potential operation of the dormant provision, s. 33 of the Personal Data (Privacy) Ordinance (“PDPO”), over the course of 2016. Section 33 prohibits the transfer of personal data to places outside Hong Kong, unless otherwise exempted. This is of particular significance, especially in light of the upcoming mergers between insurance companies with headquarters and/or offices outside of Hong Kong. It is important that insurers are aware of their obligations under the PDPO and have effective privacy protection protocols in place to avoid non-compliance with the PDPO.

Will 2016 be the year for Cyber Insurance?

An educational toy manufacturer suffered a major security breach in November 2015, with the data in potentially over 5 million accounts exposed.   The attack has called into question the cyber security of local businesses and could certainly lead to greater regulatory scrutiny by the Privacy Commissioner in Hong Kong.  This kind of exposure could be the trigger for the purchase of cyber insurance in 2016.

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Clyde & Co, Partner