In view of the recent recommendation of an insurance industry organization to increase substantially the premiums for motor vehicle and employees compensation insurance, the Panel invited the Hong Kong Federation of Insurers to brief members on their recommendation. The Administration was also invited to discuss this issue and the issue of adequacy of the claims reserves of insurance companies.

Discussion with the Hong Kong Federation of Insurers

2. At the invitation of the Chairman, Mr Davinder Rajpal advised that the Hong Kong Federation of Insurers (the Federation) had a membership size of about 72 authorised insurers, which was about 75% of the authorised insurers in Hong Kong. The Federation played a technical role in collecting data from members, compiling statistics based on the data and providing professional advice on the unit costs of different types of insurance for members.

Basis of the Federations recommended premium rates

3. Members noted that the Federation had recommended an increase of 50% in the premium for motor vehicle (third party risks) insurance and it was anticipated that the Federation would also recommend a substantial increase in the premium for employees compensation insurance. They enquired about the basis of the Federations recommendations. Mr Rajpal advised that as it was necessary for insurers to ensure their solvency in the long-term to meet outstanding and future liabilities to policy holders, the Federation had worked out the unit costs for different types of insurance based on the outstanding and future claims and certain assumptions on management expenses and acquisition costs (i.e. commissions for intermediaries). As the outstanding and future claims for third party liabilities of motor vehicles were to be made on the same basis as the awards of the most recent court cases, he further explained that the recommended increase in motor vehicle (third party risks) premium was mainly attributed to the sharp rise in the awards for third party liabilities of motor vehicles in important court cases over the past few years. Mr Allan YU elaborated that the award for pain suffering and loss of amenities in two important court cases in 1994 and 1995 was 60% higher than the existing level at the time of the judgement. These cases had a significant impact on the motor vehicle (third party risks) insurance business.

4. Mr Rajpal and Mr YU remarked that the motor vehicle insurance business had experienced overall underwriting loss not only in 1995 but also in the early 1990s when car thefts were rampant in Hong Kong. The general business situation was that the increase in the premiums for motor vehicle insurance policies over the past few years had not been able to catch up with the substantial increase in the claims incurred, while the market was getting increasingly competitive. Some members expressed reservation about the Federations claim that the underwriting losses for the two mandatory insurances were mainly attributed to the substantial rise in claim costs. They opined that such losses might be attributed to factors such as high rates of commissions for intermediaries and the management inefficiency of individual companies.

5. The Chairman observed that based on the figures on premiums, claims and underwriting results provided by the Administration, he could infer that the administration expenses and commissions for intermediaries accounted for about one third of the net premiums for the two mandatory insurances in 1995. He wondered if the high level of administrative expenses and commissions indicated that there were rooms for improvement in insurance companies management efficiency and that there was inadequate competition in the market. Mr Raijal responded that the local insurance market was very competitive and insurers were already under great pressure to reduce their operational costs.

6. Members in general felt that the Federation had yet to provide substantive information on the current business situation of the two mandatory insurances (i.e. motor vehicle third party risks and employees compensation) and details on how the Federation had worked out the unit costs to justify its recommendations on the premium increases. In response to members enquiry on whether the Federation could provide the industry statistics and details on how the Federation worked out the recommended premium rates, Mr Rajpal advised that the Federation had only collected general information on the premium income and claim payments from their members in order to work out the unit costs. The Federation did not have the management financial information such as the reserves position, acquisition costs and management expenses etc. of individual companies. Such information was available to the Insurance Authority (IA) only. The Federation was also obliged not to divulge the information provided by its members to the public. However, arrangements could be made for LegCo Members to view the data collected at the Federations office.

Effect of premium recommendations on market competition

7. Some members commented that by recommending the premium rates for various types of insurance policies every year, the Federation was acting like a cartel. This practice was anti-competition and was against the spirit of free market of the local economy. In response, Mr Rajpal and Mr YU stressed that the objective of the Federations recommendations was to provide guidance to its members on what should be the reasonable unit prices for maintaining a viable business and meeting their long-term liabilities to policy holders. The recommended premium rates were not mandatory, and in fact insurers and intermediaries were under great pressure of competition to keep premiums at low levels. This was well indicated by the decrease in the overall premiums received for motor vehicle insurance in 1995 and 1996, despite the fact that the amounts of claims incurred were increasing at a rate higher than the rate of inflation in cost of living.

8. Mr YU further explained that insurance was concerned with the dispersion of risks among those paying premiums and thus was by nature an art of large numbers. It would be dangerous for individual companies to set their prices based only on the performance and trends of their own companies. Members agreed with the Federation that it was important for the Federation to compile data on the industry and provide industry statistics to individual insurers. However, they were not convinced that it was necessary or desirable for the Federation to make recommendations on the premium rates. They commented that it could be even more dangerous for individual insurers to adopt the recommended premium rates without giving due regard to the specific circumstances of their own business. They also queried the claim that the recommended premium rates were conducive to maintaining solvency of individual insurers in the long-term since there was little proof that the risk of having to incur large amounts of claims had been and would be reasonably dispersed among insurers. In this connection, the Federation did not provide information on how reinsurance had been able to spread the claim cost risk among insurers in motor vehicle and employees compensation insurance businesses. Mr LAW Cheung-kwok commented that the kind of price recommendations by the Federation would be regarded as unlawful under the fair competition legislation of some overseas countries. Hong Kong should also legislate against activities and practices that would contravene the mechanisms of a fair market.

9. Having noted members comments, Mr Rajpal said that the Federation would consider not to recommend the premium rates in future, though it would continue to provide statistical information on the industry to its members.

Discussion with the Administration

[LegCo Paper No. CB(1) 513/96-97(01)]

Motor vehicle and employees compensation insurance

10. The Commissioner of Insurance (C of I) informed members that the overall net claims incurred in 1994 and 1995 in respect of motor vehicle and employees compensation insurance businesses were as follows-

Business	Year	Net Claims (HK$ million
Motor vehicle	1994	1,677
	1995	1,863
Employees	1994	1,071
compensation	1995	1,264

He also advised that there had been no winding-up of insurance companies in the past few years, though some mergers and takeovers had taken place.

11. Some members opined that as motor vehicle (third party risks) insurance and employees compensation insurance were mandatory for car owners and employers respectively, the Administration should take positive actions against activities pertaining to manipulation of the premiums.

12. On the safeguards for policy holders and beneficiaries of the two mandatory insurances, C of I advised that the two funds administered by the Motor Insurers Bureau of Hong Kong and the Employees Compensation Assistance Fund served to provide safety valves against insolvencies of insurance companies and to cover awards or compensations that were not recoverable from insurance claims. On the supervision of the industry, he advised that IA conducted regular checks on the solvency margins and ad hoc claims reserve audits of insurers. The Insurance Companies Ordinance (Cap. 6) provided C of I with a range of powers to supervise the industry, one being the power to limit the volume of business and premium income of an insurer under certain circumstances.

13. Mr CHIM Pui-chung expressed concern that as the court had the discretion to award compensation for personal injuries at any level it considered reasonable, there might be cases that the award was so high that the insurance company concerned might be caused to wind up. He enquired if the Administration and the industry had considered means to limit the level of awards for personal injuries by the court. C of I advised that most insurers also reinsured themselves against the claim cost risk. In Hong Kong, most institutions writing reinsurance were multinational corporations with strong financial background, which should be able to settle the awards ordered by the courts of Hong Kong even if they were significantly higher than the existing level. As regards the idea of the Government imposing limits on the level of awards ordered by the court, C of I said that judicial independence was a basic and important constitutional principle, and the Administration would not interfere with the courts exercise of discretion under the law. If there were to be limits to the level of awards, such should be laid down in the law, but he doubted whether such legislative proposals would secure adequate support for enactment.

14. On whether the Federations practice of recommending insurance premiums was in contravention with the spirit of the existing legislation, C of I advised that the legislation was neutral in this respect. It did not empower IA or the industry association to compell its members to follow its recommendations. Nor did it prohibit the association from giving statistical information and analyses or recommendations on premium rates to its members.

15. The Chairman pointed out that in the United States, insurers were required to seek approval from the statutory authority for premium increases, and enquired if the Administration would consider introducing legislation to regulate the premiums. C of I advised that IA had no statutory power to regulate insurance premiums at present and he did not consider that there was a need to extend IAs statutory powers to cover this aspect as there was adequate competition in the industry at present. In the present structure of the insurance industry, there was no particular force that could hinder the interplay of supply and demand. On the supply side, there were hundreds of insurance companies and tens of thousands of intermediaries. He stressed that the existence of a large number of intermediaries offering different services and premium rates ensured that the market was dynamic and competitve.

16. At members request, C of I undertook to provide further information on the components contributing to the underwriting results of the motor vehicles and employees compensation insurance businesses in the 1990s. He also advised that the Office of the Commissioner of Insurance (OCI) had not conducted any survey on the actual premiums offered by insurers and intermediaries. However, such information could be obtained by any individual from insurance companies and insurance brokers or agents.

Admin

(Post-meeting note: The requisite information has been provided by the Administration and circulated to members vide LegCo Paper No. CB(1) 583/96-97 dated 27 December 1996.)

Claims reserves of insurance companies

17. The Assistant Commissioner of Insurance (Asst C of I) briefed members on the background and the progress of the comprehensive review of the claims reserving positions of authorised insurers as contained in the information paper. C of I supplemented that time limits were given to all the insurers under investigation to provide the requested information and explanation. The review exercise would be completed in a few months.

18. In reply to members enquiry on the under-reserved situation of authorised insurers in Hong Kong, Asst C of I advised that after a preliminary overall review, OCI had identified 42 insurers that might be under-reserved for outstanding claims and was liaising with these insurers individually. The overall under-reserved situation was not serious. The total amount of under-reserving as assessed by the OCI represented about 10% of the total outstanding claims provided by the industry. The insurer with the lowest level of claims reserve identified so far was short of provision for not more than 15% of the outstanding claims.

19. Members enquired whether the inadequacy of the claims reserving positions of insurers would be detected if there was no allegation by Standard & Poor (an international credit rating agency) on this occasion. In reply, Asst C of I said that IA conducted regular assessments of the claims reserving positions of authorised insurers in the context of examining the financial statements submitted by insurers each year. C of I advised that in respect of the solvency positions of insurers, there was a statutory requirement on the solvency margin of authorised insurers with a prescribed formula. However, there was no specific statutory requirement in respect of the claims reserving position and there was no universally accepted model for the assessment of such. He further explained that an insurer being assessed to be under-reserved under IAs model did not necessarily have a solvency problem. It might just be that the insurers had apportioned funds in favour of the companys profit account but at the expense of its provision for the claims reserve. In the case that an insurers claims reserve was assessed to be below the level acceptable to IA and the insurer disagreed with the assessment of IA, IA had the statutory power to order an independent actuarial assessment on the insurers financial position and the cost of the actuarial assessment was to be borne by the insurer. In view of the cost and the potentially adverse impact on the insurers reputation of such an actuarial assessment, insurers were in general responsive to IAs assessment and would inject funds to top up their reserves promptly where such a need was identified.

20. On whether IA would conduct a comprehensive review of the claims reserving positions of insurers on an annual basis, C of I advised that owing to resource constraints, it would not be practicable to conduct comprehensive reviews annually, but he would consider conducting regular sample assessments in future. He remarked that the comprehensive review on this occasion had achieved the purpose of raising insurers awareness of the need to maintain adequate claims reserves and making some take responsive actions to strengthen their reserve positions.

21. The Chairman cautioned that the industry should not use the need to strengthen their claims reserves as an excuse for raising insurance premiums.

II Any other business

Computer data failure of the Stock Exchange of Hong Kong on 12 December 1996

22. The Chairman informed members that the Administration had advised that the Stock Exchange of Hong Kong was still investigating into the computer problem which occurred on 12 December 1996 and thus was not ready to brief the Panel on the incident at this stage. He said that the Panel might discuss the matter in a future meeting when the investigation was completed.

23. The meeting ended at 10:40 am.

Legislative Council Secretariat
23 January 1997

Last Updated on 18 August 1998

LegCo Panel on Financial Affairs

Minutes of Meeting held on Monday, 16 December 1996 at 8:30 a.m. in Conference Room A of the Legislative Council Building

I Review of the insurance industry