Proposed Establishment of an Independent Insurance Authority

During August 2010, FSTB issued the Consultation Paper on Proposed Establishment of an Independent Insurance Authority. This Monday (11 October 2010) was the due day for submission. I provided the comments to FSTB on behalf of the International Academy of Financial Management - Hong Kong Chapter ("IAFMHK"), which are set out as follows:

Consultation Questions

1. Do you agree that an independent IA should be established along the principles set out in paragraph 2.6?

IAFMHK: We agree to the establishment of an independent IA for more effective regulation of the insurance industry. This is in line with the regulatory practices of banking and securities industries in Hong Kong.

2. Do you think that there are other important principles in addition to those set out in paragraph 2.6 that the Administration should adopt in working out the detailed legislative proposals for the establishment of the independent IA? If so, what are they?

IAFMHK: We think that the independent IA should also adopt two more principles: (a) protection of the interests of insurance agents working for insurance companies; and (b) education of the general public about insurance products and industry practices.

3. Do you agree that the independent IA should have an expanded role beyond the existing functions of the IA as set out in paragraph 3.1? If so, do you agree that the independent IA should assume the additional functions as proposed in paragraphs 3.3 and 3.4?

IAFMHK: Agree, especially the independent IA should be able to directly supervise insurance intermediaries.

4. Do you agree the independent IA should also have a duty to enhance the competitiveness of the insurance industry, which will help to reinforce Hong Kong’s status as an international financial centre?

IAFMHK: The fundamental responsibility of the independent IA remain the enforcement of insurance regulations. However, it should adopt a pragmatic regulatory approach to avoid hindering the industry from product innovation and business versatility.

5. Do you agree that the independent IA should be vested with additional powers as proposed in paragraph 4.7 to enable it to regulate insurers more effectively?

IAFMHK: Agree. The additional powers are necessary for the independent IA to enforce the relevant laws and regulations.

6. Do you consider that the existing self-regulatory arrangements for insurance intermediaries should be changed, and if so, do you support that Option 2 (i.e. direct supervision of insurance intermediaries by the independent IA) should be pursued? If not, why?

IAFMHK: We support Option 2.

7. Do you consider that in relation to the sale of insurance products in banks, the HKMA should be vested with powers similar to those for the independent IA to allow HKMA to regulate bank employees selling insurance products given the different client profile and sale environment in banks?

IAFMHK: Different client profile and sale environment is not a sufficient reason to justify that sale of insurance products in banks should be regulated by the HKMA. For avoidance of regulatory arbitrage, sale of insurance products by insurance companies, insurance brokers, independent financial advisors and banks should be regulated by a single and specialist regulatory body.

8. Do you agree that the recommendations as set out in paragraphs 6.5 to 6.8 should be pursued for the independent IA to operate as an independent entity? Any other views?

IAFMHK: We largely agree to the recommendations but suggest that the incentive pay should be linked to the meeting of certain objective performance pledges.

9. Do you agree with the proposed checks and balances and governance arrangements for the independent IA as set out in this Chapter?

IAFMHK: We agree to the proposed checks and balances and governance arrangements. In addition, we suggest the establishment of a mediation and arbitration mechanism to resolve the commercial disputes among insurance companies, insurance intermediaries and/or insurance policyholders.

10. Do you agree that the Government should provide a lump sum to support the independent IA in its initial years of operation and the independent IA should seek to reach full cost recovery in six years?

IAFMHK: We agree that the Government should provide financial assistance to the support the independent IA in its initial years of operation. However, we suggest a longer period (say, 10 years) for full cost recovery to reduce the burden of the insurance industry.

11. Do you agree with the proposed fee structure as set out in paragraphs 8.2 and 8.6?

IAFMHK: We agree to the proposed fee structures.