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Regulations to protect insurance policy holders
The Government today (Thursday) announced regulations to protect the interests of insurance policy holders and to ensure that Hong Kong conforms with international practices in the supervision of long term insurance business.
The Insurance Companies (Margin of Solvency) Regulation 1995 and the Insurance Companies (Determination of Long Term Liabilities) Regulation 1995, which will be published in the Gazette tomorrow (Friday), lay down the detailed requirements for an enhanced solvency margin for classes A to F and I of long term insurance business and the principles for the valuation of the liabilities of long term business respectively.
The spokesman explained that the solvency margin for long term business had remained unchanged at $2 million since the enactment of the Insurance Companies Ordinance in 1983.
"There is therefore an urgent need to bring the solvency margin to a level bearing a direct relationship to the size and nature of the long term business carried on by an insurer."
He said the purpose of setting up the solvency margin was to provide an early warning system to identify weaknesses in the financial strength of insurers.
The overriding criterion is that the mechanism can provide sufficient buffer to enable early remedial action to be taken before an insurer becomes insolvent.
The new solvency margin requirement prescribed by the Insurance Companies (Margin of Solvency) Regulation 1995 is generally a sum of two components.
The first component is a percentage, generally 4 per cent, of the policy reserves which cover provisions for future contractual liabilities. The second component is a percentage, generally 0.3 per cent, of the capital at risk, which is the sum assured net of the amount of the policy reserves.
In the valuation of liabilities of long term insurance business, a policy reserve is placed on each policy or group of policies.
In virtually all overseas insurance regulatory regimes, there are statutory bases for calculating policy reserves. However, in Hong Kong, there are no such bases other than the general reference to the principle of prudence.
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