XN000022-1997-03-12 — Page 11

Reply:

- 7

Mr President,

(a)

(b)

The purpose of reinsurance is to spread the risks of an insurance company. It has been the practice for insurance companies world-wide to reinsure both locally and overseas in order to achieve adequate spreading. The Insurance Companies Ordinance ("the Ordinance") does not prohibit insurance companies authorized in Hong Kong from entering into reinsurance arrangements with reinsurance companies not authorized here. An insurance company is required under the Ordinance to submit to the Insurance Authority ("IA") the reinsurance premiums it pays to all its reinsurers, but a breakdown into those paid to reinsurance companies authorized or not authorized in Hong Kong is not required. Whilst such a breakdown is not required for prudential regulation, the IA estimates that, of the $6.8 billion of reinsurance premiums paid out by the Hong Kong general business insurance companies, about $3.9 billion (i.e. 58%) went overseas to reinsurance companies not authorized in Hong Kong.

An insurance company may occasionally be unable to obtain recovery of claims from the reinsurance companies for various reasons, including operational problems and insolvency of the reinsurance companies. Any non-recovery of claims from reinsurance companies will be treated as bad debts and will be written-off by an insurance company in the normal course of business. The Ordinance does not require such non-recovery of claims to be reported separately in the financial statements to be submitted to the IA, and hence we have no information in this respect. According to our records, no insurance company in Hong Kong has been affected in the past 5 years by non-recovery of claims from reinsurance companies to an extent which rendered it unable to meet the solvency margin requirement under the Ordinance. This is probably because reinsurance, for the purpose of spreading risks, is normally placed with a panel of reinsurance companies (sometimes more than 20). It is therefore unlikely that failure of a single reinsurance company would significantly affect the solvency position of the insurance company concerned.