Information Note for the LegCo Panel on Financial Affairs
Special Meeting on 16 December 1996
Adequacy of reserves of insurance companies
Claims reserve (or provision for outstanding claims) is a provision set aside for paying future claims arising from accidents that have already occurred. It is an estimated figure based on past experience and current trend, and is therefore not an exact science.
2. As part of his routine monitoring of the solvency position of insurers, the Insurance Authority ("IA") has been assessing, since the enactment of the Insurance Companies Ordinance in 1983, the adequacy of their claims reserve when examining their financial statements which may be submitted at different times during the year. The matter has attracted public attention mainly because of Standard & Poors allegation earlier this year that the Hong Kong non-life insurance industry might be under-reserved.
3. In response to public concern, the IA has undertaken a comprehensive review of the claims reserving position of insurers writing motor and employees compensation ("EC") business based on the latest statistics available to him. By applying our appraisal models, we are able to detect early warning signals if a particular insurer is likely to have under-reserved for its outstanding claims.
4. The review has identified 42 insurers as appearing likely to have under-reserved for their losses. The IA has commenced dialogue with most of them and hopes to have discussed with all insurers concerned by the end of this year. If under-reserving is confirmed, the insurer concerned will be required to top up the reserve by the deficient amount.
5. The effect of under-reserving on the financial position of an insurer is that its underwriting profit will be inflated by a corresponding amount. Under-reserving for claims therefore does not necessarily mean insolvency of the insurer if it has adequate free reserves to cover the portion under-reserved. According to information available to the IA, the insurance industry remains financially sound as a whole.
Rise in Motor Insurance Premium
6. Motor vehicle insurance insures a person against losses or damages arising out of or in connection with the use of motor vehicles. At present, Hong Kong has 93 insurers authorized to carry on motor vehicle insurance business, thus providing a competitive market.
7. The Accident Insurance Association ("AIA"), an insurance industry organization whose membership is voluntary, has recently recommended an overall increase of about 12% in motor insurance premiums for all types of vehicles for 1997 and an increase in the premium rate for private car third party liability cover from $3,200 to $4,800. The recommended rates will commence to apply on 1st January 1997.
8. The recommended rates are advisory in nature. It is not mandatory for members to follow AIAs recommendations. Insurers are free to set their premium rates having regard to their own business strategy, the prevailing market conditions and their own previous experience. In practice, it is not uncommon for insurers to offer premium discounts in order to maintain their competitiveness.
Employees Compensation Insurance
9. EC insurance provides cover for employers against their liability for employees compensation. At present, Hong Kong has 117 insurers authorized to carry on EC insurance business.
10. The AIA has indicated that they are in the course of analysing the result of their members in this line of business and will be coming up with the recommended rate for 1997 very shortly.
11. The role of the Insurance Authority is to ensure that insurers remain financially sound. The Government does not consider it appropriate to intervene in the fixing of insurance premiums which should be left to be determined by the interplay of market forces. In fact, the IA is prohibited by the Insurance Companies Ordinance (section 26(3A)) from intervening in the fixing of premiums.
12. Statistics on the motor and EC insurance business are annexed (Annexes A and B).
[FT4/N-LECO-P.DOC/ss]
Annex A
Underwriting Result
(A) Motor Vehicle
(Direct & Reinsurance Inward Business)
|
1994
|
1995
|
|
(HK$ million)
|
(HK$ million)
|
|
|
|
|
Gross Premiums
|
4,140
|
3,718
|
|
|
|
|
Net Premiums
|
3,120
|
2,927
|
|
|
|
|
Underwriting Profit (Loss)
|
537
|
(22) |
(B) Employees Compensation
(Direct Business)
|
1994
|
1995
|
|
(HK$ million)
|
(HK$ million)
|
|
|
|
|
Gross Premiums
|
3,110
|
3,061
|
|
|
|
|
Net Premiums
|
2,050
|
1,993
|
|
|
|
|
Underwriting Profit (Loss)
|
(17)
|
(17) |
[FT4/GR-PREM3.DOC/ss]
Annex B
Gross Premiums (Based on Monthly Returns)
(A) Motor Vehicle
(Direct & Reinsurance Inward Business)
|
Amount
|
|
(HK$ million)
|
|
|
|
Jan 95 - Sept 95
|
2,707
|
|
|
|
Jan 96 - Sept 96
|
2,248
|
|
|
|
% change
|
-17% |
(B) Employees Compensation
(Direct Business)
|
Amount
|
|
(HK$ million)
|
|
|
|
Jan 95 - Sept 95
|
2,385
|
|
|
|
Jan 96 - Sept 96
|
1,756
|
|
|
|
% change
|
-26%
|
|
|
[FT4/GR-PREM4.DOC/ss]
Last Updated on 18 August 1998
