The release this week of conclusions from a recent consultation and final proposals on the so-called Policyholders’ Protection Fund (PPF) comes after years of discussion about whether such a scheme would provide a desirable layer of extra protection for consumers, or merely an extra layer of costs for insurers.
According to the South China Morning Post, the government first consulted the industry on the matter in 2003, “but shelved the idea due to strong opposition from the industry”. A three-month public consultation last year, however, indicated there was support for the idea, the SCMP said.
That survey solicited views from the public as well as the industry on the idea of a PPF, as well as the perceived best levels of coverage, compensation, funding mechanism and governance arrangements.
Currently in Hong Kong, consumers are protected in the event that a Hong Kong bank or insurance broker were to fail, but have no protection in the event of an insurance company insolvency.
The consultation may be viewed on the website of the Financial Services and the Treasury Bureau, an arm of the Hong Kong Special Administrative Region government, at www.fstb.gov.hk.
The current plan is for the PPF to be introduced to Hong Kong’s Legislative Council during its 2012/2013 legislative session, to take effect "in 2013/2014 at the earliest", the FSTB said.
Features of the Policyholders’ Protection Fund as currently proposed:
- All insurers doing business in Hong Kong would contribute 0.07% of their premium income into a fund which would be drawn on in the event of an insurance company’s collapse
- There would be two separate funds: One for life insurance policyholders, worth HK$1.2bn ($155m), and the other for holders of general insurance policies (worth HK$75m).
- The ceiling on the compensation limit per claim is apparently still under discussion; most of those who have commented thus on a proposed limit of 100% for the first HK$100,000 of any claim, plus 80% of the balance up to a total of HK$1m, have said this was "appropriate" while some others felt it should be raised, the consultation conclusion and proposals noted.
- Insurers might be able to be exempted from the PPF scheme if, due to being domiciled elsewhere and already covered by similar policyholder protection schemes, "if they are able to demonstrate that they offer equivalent protection to their policyholders in Hong Kong, via an overseas scheme of similar nature".
Hong Kong’s interest in setting up a compensation scheme for insurance policy holders is the latest move in a series by governments around the world to boost consumer protection levels and enhance public confidence in financial services institutions in the wake of the global financial crisis of 2008 and the collapse of such entities as Lehman Brothers. That particular failure resulted in the loss of savings for individual investors around the world, including around 43,000 in Hong Kong.
Most countries with reasonably-developed financial services industries have some form of compensation schemes in place for consumers. However, they can vary significantly between jurisdictions, with individual investors often not realising the shortcomings of schemes they believed were in place to help them until too late, according to Neil Chadwick, technical marketing manager at Royal London 360, the Isle of Man-based life insurance product provider.
For example, he noted, the UK’s Financial Services Compensation Scheme – which is designed to compensate individuals who have accounts with Financial Services Authority-authorised businesses in the event that the company with which they had their account was no longer able to meet its obligations – would not cover a policyholder who was not resident in the UK at the time he or she took out the policy.
“Policyholder protection is and has been a talking point amongst IFAs for some time now, but especially since 2008,” Chadwick added. “Investors want to know that the institution with which they are investing is not only financially robust, but that they also have some protection [if that institution were to fail].
“For this reason, it is essential that the adviser or client really do their homework on any fund they select on an open architecture product to ensure that they are comfortable with the fund’s investment objective, management, and more importantly, its operational history.”
‘Support from public, industry’
KC Chan,secretary for Financial Services and the Treasury, noted that there was "support from the general public and industry for the establishment of a PPF and most of the key elements of the consultation proposals".
"The PPF will be a safety net for policyholders when an insurer becomes insolvent," he added, in a statement on the Hong Kong Government’s website.
"It will enhance the stability and competitiveness of our insurance industry."
