Enriching Lives: A History of Insurance in Hong Kong, 1841-2010

Chapter 5 - The Formation and Evolution of Industry Supervision

Chapter 5 The Formation and Evolution of Industry Supervision A decade earlier, in the mid-1970s, the industry was very different from what it is today. Life insurance, with the exception of operators representing international insurers catering primarily to the expatriate market, was minimal. General insurance was dominated by a few players, principally large general agencies representing big overseas insurers. Agents were mainly tied and, other than in marine hull, brokers were not a major force. Domestic insurers were struggling for a share of the market. Prudential regulation and control were almost non-existent and capital requirements for insurers were derisory. One could register and operate an insurance company with a capital sum of HK$10,000, if my memory serves me correctly. Fly-by-night operators without any sense of responsibility either to the industry or to the public cropped up continually. That most sensitive of all insurance buying groups, the motorists, were constant victims. At a time when the rights and interests of the consumer were increasingly coming into focus—the age of consumerism—the public perception of insurance was extremely negative. Alleged abuses and unprofessional conduct were constantly high on the hit list of the new Consumer Council, formed in 1974. — Michael Somerville, The Story of the Hong Kong Federation of Insurers 1988–1998 All legal matters related to insurance were dealt with using contractual agreements and common law cases. The earliest government regulations on the insurance industry were embodied in laws governing other economic activities, such as the Companies Ordinance and the Workmen’s Compensation Ordinance. 130 Enriching Lives In the 1950s, the Hong Kong government set about laying down laws for the insurance sector. Hence, both the Third Party (Rights Against Insurers) Ordinance and the Motor Vehicles Insurance (Third Party Risks) Ordinance were enacted. The former guarantees a third party’s right to seek compensation in the event that a policyholder or insurance firm files for bankruptcy. The latter is based on the Road Traffic Ordinance, which mandates insurance coverage for all drivers so as to protect the third party’s right to compensation in case of accidents caused by drivers. Figs. 5.1 & 5.2 A commercial motor vehicle policy issued by the China Insurance Co. Ltd., 1973–74. Left, cover page; right, inside page. 131 The Formation and Evolution of Industry Supervision In 1961, Hong Kong’s legislature passed the Marine Insurance Ordinance, based on Britain’s Marine Insurance Act of 1906, which was drafted by Sir Mackenzie Dalzell Chalmers, the parliamentary counsel to the Treasury. This act has stood as the model marine insurance act for many other countries. However, even before the mid-1970s, primarily reflecting its laissez faire economic policy, the government’s supervision of the sector was rather lax. All it took to start a business was to show some cash, and not much for that matter. A company offering fire or marine products was required to deposit, for each branch, $100,000 in cash or acceptable securities. For life insurers, the capital requirement amounted to three-quarters of the firm’s annual premium income, minus claims and losses. A separate fund to meet policy liabilities must be maintained and a quinquennial (decennial for some older, established firms) valuation balance sheet submitted. The required deposit should be no less than $50,000 but not exceeding $200,000.1 But all insurers may qualify for certain general exemptions if they complied with Britain’s requirements for authorization contained in the Insurance Companies Act of 1974. After the mid-1970s, to groom Hong Kong as an international insurance centre and protect policyholders’ interests, the government began to introduce legislation and strengthen supervision on the industry. But before that happened, the number of insurance firms continued to mushroom, from 186 in 1975 to 335 by 1979. Facing increasingly vociferous criticisms of the insurance sector, the government’s regulatory body called upon industry leaders and other veteran practitioners to examine how the industry could be reined in, through both self-regulatory measures and legislative means. After some arduous negotiations, a working group convened by Michael Somerville decided on the three principles that should guide the Hong Kong insurance sector: 132 Enriching Lives • The regulatory mechanism should be tailored for the city’s unique business environment and should not be thoughtlessly transplanted from another country. • Companies need to operate on adequate liquidity, and their boards of directors and executive suites should be filled by fit...