Consultation on establishing policy holders' protection scheme launched
30.12.2022

The Financial Services and the Treasury Bureau (FSTB) published today (December 30) a consultation paper on the proposal to establish a policy holders' protection scheme (PPS), and launched a three-month public consultation exercise. The Secretary for Financial Services and the Treasury, Mr Christopher Hui, said, "As stated in our announcement on the Development Roadmap for the Insurance Sector in Hong Kong earlier this month, one of our visions and missions is to unleash the social value of insurance by providing comprehensive risk management and mitigation solutions to all members of the public. We propose to establish the PPS to provide compensation to policy holders or secure continuity of insurance contracts in case an insurer becomes insolvent. The PPS will provide an additional safety net for policy holders in addition to the prevailing prudential regulatory regime. This will in turn strengthen market stability, enhance public confidence in the insurance industry and further benchmark the regulatory regime in Hong Kong with international standards and best practices." The consultation paper sets out key features of the proposed PPS including coverage, level of compensation, a funding mechanism and governance arrangements. Major aspects of the proposed PPS are as follows: 1. to establish the PPS by statute, and set up a statutory body (viz the Policy Holders' Protection Scheme Board) to oversee the operation of the PPS, with the Insurance Authority serving as the administrative arm; 2. to establish the Long Term Fund and the General Fund under the PPS, which will respectively cover the majority of long term policies and general policies underwritten by direct insurance companies; 3. the majority of the direct insurers carrying on long term and general insurance business will be required to participate in the PPS; 4. to adopt a progressive funding model for the PPS which seeks to collect an initial levy to build up a reserve, and an additional levy upon occurrence of an insurer insolvency where necessary; 5. insurers participating in the PPS will be required to pay an initial levy at the rate of 0.07 per cent of the applicable premiums; 6. to allow the PPS to borrow from a third party to bridge a liquidity gap, and impose an additional levy up to the 1 per cent of the applicable premiums in case the PPS has insufficient fund to meet all liabilities of an insurer insolvency; 7. to set a compensation limit under the PPS. Views from all quarters of the community on the three respective $1 million, $2 million or $4 million options of the cap are welcome; 8. the compensation limit should generally apply to long term insurance on a per-policy basis and to general insurance on a per-claim basis; 9. for protected long term policies as well as accidental and health policies with guaranteed renewability, the priority of the PPS is to facilitate the transfer of policies to a replacement insurer or set up a dedicated insurance company for running off the business of an insolvent insurer. In the event of a policy termination, the PPS may make an ex-gratia payment to enable the policy holders to procure replacement policies; and 10. for protected general policies, the PPS will provide extended coverage for up to 60 days following the procedures triggering activation of the PPS, or until the policy expiry, whichever is earlier. Any unexpired premiums will be refunded; and 11. the PPS will focus on individual policy holders at the initial stage of implementation, and expand to cover small and medium-sized enterprises as and when conditions are ripe. The spokesman for the FSTB said, "We welcome members from all quarters of the community to give views on the proposal of the consultation paper. We will fully consider the views received when finalising the proposal to establish the PPS." The consultation paper is available on the webpage of the FSTB at www.fstb.gov.hk/fsb/en/publication/consult/consult-policy.html . Members of the public may submit views to the FSTB by post (24/F, West Wing, Central Government Offices, 2 Tim Mei Avenue, Tamar, Hong Kong), by fax (2527 0292) or by email ( pps_consultation@fstb.gov.hk ) on or before March 31, 2023.