LegCo Subcommittee on MPF System
Information Note
Professional Indemnity Insurance

Purpose

This paper describes the proposals on professional indemnity (PI) insurance, comprising :

  1. coverage of PI insurance (paragraph 2 below);
  2. level of indemnity (paragraphs 3 and 4 below);
  3. jurisdiction of Hong Kong courts (paragraph 5 below);
  4. the use of non-exclusive PI insurance (paragraph 6 below); and
  5. suppliers of PI insurance (paragraph 7 below).

Proposals

Coverage

2. We propose that the approved trustee of a scheme should ensure that there is adequate professional indemnity insurance to cover the scheme for losses in scheme assets, including insurance against misfeasance or other illegal conduct by the approved trustee, other service providers to whom the trustee has delegated his duties, and against losses caused by any other persons. This insurance coverage should be comprehensive and should include protection against the following risks:

  1. Fidelity and Crime:-
    1. cover against fraud or dishonesty - loss resulting from fraudulent or dishonest acts by the trustee or other service providers;
    2. cover against loss inside premises - loss of property (e.g. cash, securities, books of account) from the premises of the trustee, other service providers or financial institutions;
    3. cover against loss of property while in transit - loss of property while it is being transported in the custody of the trustee or other service providers;
    4. cover against forged cheques/securities - loss caused by acting on a cheque or security which is counterfeited, forged, fraudulently altered, lost or stolen; and
    5. cover against computer and funds transfer fraud - loss resulting from computer fraud including data reconstruction costs and theft of funds from fraudulent transfer instructions.

  2. Liability :-

    cover against loss arising from indemnification to the trustee pursuant to scheme rules as permitted under the Ordinance.

Level of Indemnity

3. We propose that the minimum level of professional indemnity required be as follows:

MPF Assets under Management
(HK$ million)

P.I. Required

Level of
Indemnity Required
(HK$ million)

100 or less

30%

0-30

100-300

$30 m + 20% of any amount in excess of $100 m

30-70

300-500

$70 m + 15% of any amount in excess of $300 m

70-100

500-1,000

$100 m + 10% of any amount in excess of $500 m

100-150

1,000-5,000

$150 m + 5% of any amount in excess of $1,000 m

150-350

5,000-10,000

$350 m + 3% of any amount in excess of $5,000 m

350-500

>10,000

$500 m

500

4. We propose that the maximum deductible should not exceed HK$100,000 in respect of claims on MPF related professional indemnity insurance.

Jurisdiction of Hong Kong Courts

5. We propose that the policy should be subject to the jurisdiction of Hong Kong courts.

Coverage by Non-exclusive Professional Indemnity Insurance

6. We propose that approved trustees and other service providers may use professional indemnity insurance which does not specifically and exclusively cover MPF business provided that the minimum requirements of paragraphs 3 to 4 are met.

Suppliers of PI Insurance

7. We propose that the supplier of professional indemnity insurance should either be insurers authorised in Hong Kong, or be overseas insurers with an acceptable credit rating.

Justification

Coverage

8. Our proposal to require trustees to make arrangements for adequate professional indemnity insurance to cover an MPF scheme will protect scheme assets against losses arising from misfeasance, illegal conduct and other perils. As a matter of fact, professional indemnity insurance is increasingly utilized by pension plan trustees in other countries such as Australia, Canada, UK and USA.

9. Where a trustee delegates his functions, the trustee remains responsible for the security of scheme assets. The trustee may arrange for all the professional indemnity insurance required, or may request a service provider to share the professional indemnity insurance burden by bearing its own level of professional indemnity cover. In any case, the trustee must ensure that there is appropriate professional indemnity insurance cover, which meets MPF requirements, for scheme assets handled by him and his service providers.

Level of Indemnity

10. The proposed minimum level of professional indemnity insurance is similar to retirement scheme professional indemnity insurance levels available in the USA and UK. It reflects the need to ensure that MPF scheme members are adequately covered in the event of significant losses on the one hand, and the need to ensure that premium costs are not excessive on the other.

11. The proposed cap on the maximum deductible, that is, the first part of the cost of a claim which the insurance policy does not cover, is necessary to ensure that the assets of the scheme asset are as fully protected as possible in the event of MPF scheme claims. The HK$100,000 limit is set having regard to the ability of trustees to indemnify the scheme for losses on the one hand, and the need to keep premium costs reasonable on the other.

Jurisdiction of Hong Kong Courts

12. Incidences which give rise to claims on PI insurance are often complicated. Having the policy subject to the jurisdiction of Hong Kong courts will provide greater protection to MPF schemes.

Coverage by Non-exclusive PI Insurance

13. It is more cost effective for trustees and service providers to arrange for PI insurance for their MPF business as part of their total package of business activities, especially as some of them may already have existing PI insurance coverage for non-MPF business. We therefore propose that these insurance arrangements should be allowed as long as the MPF scheme is covered under adequate PI insurance.

Suppliers of PI Insurance

14. PI insurance is a very specialised line of insurance business and most of the underwriters of PI insurance are not based in Hong Kong. Some trustees and service providers are also under global insurance coverage arranged for their group companies. We therefore propose a flexible approach to accept insurance coverage provided by authorised insurers, who are under the effective regulation of the Insurance Authority, as well as leading insurers in the field meeting an acceptable credit rating.

Mandatory Provident Fund Office
Financial Services Branch
13 November 1996
[Ref. : Paper/MPF/SC-5]

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