Asia Pacific - focus on insurance
February 2011

Australia

Major change to tax treatment of TPD insurance premiums looms

In Australia, superannuation funds (known elsewhere as pension schemes) are the major purchasers of life risk insurance. Simply stated, the trustee of the fund buys life insurance which pays a benefit to the trustee if a specified event happens to a member of the fund, e.g. if a member dies. The trustee uses the proceeds of the insurance to augment the benefits which it pays from the fund.

Historically, the kinds of life insurance bought by superannuation trustees have included combinations and permutations of various kinds of total and permanent disability (TPD) insurance cover. These have included:

• “any occupation” cover;
• “own occupation” cover;
• “loss of independence” cover;
• “home duties” cover; and
• “loss of limbs and/or sight” cover.

Historically, funds have claimed a full tax deduction for premiums paid for any kind of TPD cover.

In 2007 the law was changed in a way which meant, in effect, that a fund can only claim a tax deduction for TPD insurance premiums to the extent that the cover provided is “any occupation” cover. However, transitional relief has allowed funds to continue claiming a full tax deduction for any kind of TPD cover.

The transitional relief ends on 30 June 2011. For the 2011-12 and later income years, funds will only be able to claim a tax deduction for TPD insurance premiums to the extent that the cover provided is “any occupation” cover.

What does this mean for life insurers?

From 1 July 2011 many superannuation trustees may stop buying kinds of TPD cover other than "any occupation" cover. If this happens, life insurers may want to look for ways to continue providing "own occupation" and other kinds of TPD cover, outside of superannuation, to members of superannuation funds who presently have TPD cover other than "any occupation" cover through superannuation and who want to continue having that cover. This would present significant challenges for life insurers.

A detailed explanation of the changes is set out in our Legal Update Superannuation funds: tax deductibility of TPD insurance premiums cut back

For further information please contact Scott Charaneka in Sydney.

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China

China tightens rules on bancassurance - CIRC Draft Guidelines

Following publication by the China Banking Regulatory Commission (CBRC) last November of rules governing bancassurance (CBRC Rules), the China Insurance Regulatory Commission (CIRC) has now issued draft guidelines to clarify the qualifications and responsibilities of commercial banks and insurers undertaking bancassurance business (CIRC Draft Guidelines). The CIRC Draft Guidelines have not yet been officially issued, but the CIRC has collected comments from insurers and is considering publishing them jointly with the CBRC.

We believe that this latest round of regulatory changes to the bancassurance market, alongside the incremental regulatory reforms to distribution channels and product types will gradually align China's insurance market with the more mature markets in Europe and the United States.

The main objectives of the CIRC Draft Guidelines are summarised below.

Qualifications required to conduct bancassurance business

The CBRC Rules explicitly prohibit insurers’ employees from selling insurance products in bank outlets. The CIRC Draft Guidelines confirm this prohibition, and further stress the condition that only bank sales staff that are qualified as professional insurance agents may sell insurance products in banks. In addition, only a commercial bank and a solvent insurer (neither of whom has breached regulatory law in the past two years) may cooperate with each other to conduct bancassurance.

Cooperation between commercial banks and insurers

The CBRC Rules restrict each bank outlet to cooperation arrangements with a maximum of three different insurers. Interestingly, the CIRC Draft Guidelines are silent on this restriction and only require commercial banks and insurers to choose partners subject to their capabilities, while requiring the term of any such cooperation agreement to be for a minimum of one year.

Restrictions and Consequences

The CIRC Draft Guidelines set out further restrictions and requirements for firms undertaking bancassurance business. Agents’ fees paid by insurers to banks for introducing business must be fully accounted for and employees of commercial banks must not receive any more commission than that provided for in the cooperation agreements. Another restriction similar to the CBRC Rules is that bank sales staff must not mislead customers by mixing insurance products with saving products or wealth management products, or by simply comparing the return on the insurance products with bank products. Any violation of these restrictions will result in the suspension or even cancellation of the bancassurance operations.

Additional requirements and expectations

The CIRC Draft Guidelines set out some other requirements and expectations that were not imposed by the CBRC Rules. For example, commercial banks and insurers are now required to enter into business cooperation agreements to clarify the parties’ responsibilities and liabilities, as well as the nature of the products offered. Banks and insurers are also encouraged to innovate on the range of products available and to explore different selling techniques, such as the internet or telemarketing.

Analysts have remarked that the new restrictions imposed by CBRC and CIRC will have a significant impact on medium and small-sized insurance companies who are typically heavily reliant upon bancassurance, and will lead not only to a short-term drop in banks' commission income but also an increase in training costs.

Nevertheless, the development of better integrated banking and insurance partnerships, together with improvements in product innovation are key priorities in developing the bancassurance market in China. We expect to see a period of increased investments in product development, marketing, customer service and platform synergy in the near future.

For further information please contact Lynn Yang in Shanghai.

Life insurer’s duty of disclosure attracts strict enforcement by the CIRC

On 10 January 2011, the CIRC published a decree (CIRC Administrative Penalty [2011] No.1) to penalise a well established sino-foreign joint venture life insurance company for breaches of the Administrative Measures on Disclosure of Information in New Products of Life Insurance (the Measures) which have been in effect since 1 October 2009 (CIRC Order [2009] No.3). This decree sends a clear message to the market that life insurers need to review their internal compliance procedures to ensure they meet the disclosure obligations imposed by the Measures and the Insurance Law of the People’s Republic of China.

Under the Measures, the insurers’ duty to disclose information mainly requires: (a) that the insurer and its agents ensure that the information they disclose to the proposer, the assured, the beneficiary and the general public be accurate, objective and in simple language which is easy to understand; (b) that for life insurance of individuals, insurers must provide the proposer with a copy of the standard terms and conditions of the policy and the insurer is required to ask the proposer to copy and write down a standard sentence to confirm that they have read and understood the clauses of the policy and that they also understand the uncertain nature of the benefits prescribed under the policy; and (c) save for group life insurance, that the insurer should establish a feedback procedure (for policies of more than a year’s duration) to be completed preferably by telephone within the cooling-off period.

The Measures also set out minimum information requirements that insurers should disclose in their promotional materials, advertisements, posters and telephone feedback calls depending on the type of products. In the reported CIRC case, the particular insurer, in their feedback telephone calls during the cooling-off period, failed to (a) inform the proposer of their rights to cancel the policy within the insurance cooling-off period; (b) confirm with the proposer their knowledge of the excluded perils; or (c) confirm with the proposer knowledge of the deduction of premium, the rate of deduction or the deduction sum. As a result, the insurer in question was fined RMB300,000 (approximately USD 45,000) and the individual operation manager in charge of the feedback telephone calls system was fined RMB50,000 (approximately USD7,500) and given an administrative warning.

Apart from the administrative fines and warnings, it is not clear whether the breach of duty by the insurers may affect the validity of the underlying insurance policies. Insurance Law is silent on this issue. The common view is that, in such situations, the assured may claim that the unfavorable terms and conditions (e.g. the exclusions and deductions) in the policy are invalid and thus do not apply. However, it is less clear whether the assured may be allowed to cancel or terminate the insurance policy as a whole for breaches by the insurers (Article 17, Insurance Law).

For further information please contact Wenhao Han in Hong Kong.

Top legislature adopts comprehensive social insurance law

On 28 October 2010, the Standing Committee of the National People’s Congress of the People’s Republic of China passed the Social Insurance Law, which will take effect on 1 July 2011.

This law consolidates previous regulations and administrative measures in this area and provides a comprehensive framework to improve the social insurance system in China. The law regulates five basic types of social insurance: basic pension, basic medical insurance, unemployment insurance, occupational injury insurance and maternity insurance.

The law removes many of the obstacles under the old regulations which restricted the free movement of the country’s increasing migrant population. Under the law, a new national system will be established to allow basic pension, basic medical and unemployment insurance to be transferred between different qualifying locations as and when citizens move around the country.

The law also has a general provision relating to social insurance for foreigners working in China which allows foreign nationals to participate in the People’s Republic of China social insurance system (Article 97, Social Insurance Law 2010). However, the provision does not contain a great amount of detail as to how it will be implemented.

For further information please contact Wenhao Han in Hong Kong.

Case note: Qais Trading Ltd v BOC Insurance Co Ltd [2010] Zhe Hai Zhong Zi No. 44, PRC

The claim concerned a marine cargo insurance policy. The policy covered all risks plus theft and non-delivery of a parcel of textile goods shipped from Shanghai via Jebel Ali to a warehouse in Sharjah in the United Arab Emirates (UAE) in 2008. The insurance period was from warehouse to warehouse. The cargo was reported to be missing by theft shortly after it had been unloaded and arrived at Sharjah. The insurer denied liability on the following grounds: (1) the loss of the cargo occurred outside the insurance period; (2) the assured did not comply with the notification conditions as prescribed in the policy, breach of which discharged the insurer from liability; (3) the lawyer’s fees, translation fees and notarisation fees were not fees necessary for investigating the cause of the loss as provided in Article 64 of the Insurance Law.

On appeal, the Zhejiang High People’s Court of the People’s Republic of China upheld the decision by the first instance Ningbo Maritime Court. The Court held that: (1) on the balance of evidence, the assured failed to prove that the loss occurred prior to the arrival of the cargo at the designated warehouse. On that basis, the assured’s claim was dismissed; (2) the lawyer’s fees, translation fees and notarisation fees are not fees that fall under the definition set down by Article 64 of the Insurance Law which provides that reasonable and necessary fees incurred by the assured for investigating and determining the cause and extent of the loss are recoverable from the insurer.

Another interesting point to note in the case is that at first instance, the court held that the notification requirement in the insurance policy, if not complied with, provides the insurer with a complete defence on liability.  Clauses having such a draconian impact on a claim should be printed in a way that is sufficient to catch a reasonable person’s attention and be explained to the assured clearly, either in writing or orally, so that the assured understands the true meaning of the clause and its effects. Otherwise, the clause will be invalid. The decision was not appealed. It shows how the court will interpret the effect of such notification clauses in the future.

For further information please contact Wenhao Han in Hong Kong

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Hong Kong

Further consultation on the proposal to establish an independent insurance authority in Hong Kong

In July 2010 the Hong Kong Government published a consultation paper that proposed establishing an independent insurance authority (IIA). The IIA would replace the existing Office of the Commissioner of Insurance (OCI) and be financially and operationally independent from the Government. The paper invited comments on the proposal within the three-month public consultation period.

On 12 October 2010, a meeting was held at the Legislative Council of Hong Kong (LegCo) and various stakeholders who submitted opinions in relation to the proposed establishment of the IIA were invited to attend. During the meeting, stakeholders’ views were received and discussed. Concerns were raised in relation to the details (or lack thereof) of the consultation paper.  Some of the major concerns are set out below. As a result, the OCI indicated that it would further consult the industry.

Funding of the IIA

Several stakeholders expressed their reservations in relation to the fee structure of the IIA which is proposed to comprise of, inter alia, license fees payable by insurers and insurance intermediaries and a 0.1% levy on insurance policies (despite the Government providing a lump sum HK$500 million funding to help meet initial expenses and to serve as a contingency reserve). In particular, the stakeholders were concerned that the funding arrangement would undermine the competitiveness of Hong Kong’s insurance products in the international market. In relation to the levy on insurance premiums, it was suggested that: (1) the levy would increase the administrative costs of low-value insurance policies (such as travel insurance); (2) it was unfair to impose such a levy on certain types of insurance policies such as medical insurance; and (3) the consultation paper was unclear as to who would shoulder the 0.1% levy.

Dual powers with the Hong Kong Monetary Authority

Most stakeholders expressed concern about proposals to empower both the IIA and the Hong Kong Monetary Authority (HKMA) to regulate insurance products sold by banks as it could cause confusion to consumers as well as inconsistent regulatory and enforcement standards. It was also suggested that in terms of administration, the proposals could cause duplication of work between the IIA and the HKMA.

Lack of details

Several stakeholders commented that the consultation paper only sets out the proposal to establish the IIA in very broad terms without giving details as to how the proposal would actually be achieved, such as how the IIA would operate, what powers the IIA would have and whether there would be a transitional arrangement in place. Furthermore, the consultation paper did not spell out the regulatory standards and sanctions that the proposed IIA could impose and was silent in relation to the issue of training and education in the insurance industry.

Conclusion

In light of the mixed responses and various concerns and views expressed by the insurance industry and other interested bodies, several stakeholders suggested the Government should conduct a second round of consultation on the detailed arrangements for the establishing of the IIA. The OCI has yet to publish a report on the consultation conclusions, and has indicated that it will provide the LegCo with such a report, together with the Government’s responses to the views and concerns, in the first half of 2011.

We examined the proposals in our last updater and in the following briefing: A total makeover of the Hong Kong insurance supervisory system?

For further information please contact Marie Kwok in Hong Kong.

Revised Guidance Note on Money Laundering and Terrorist Financing

In October 2010, the Office of the Commissioner of Insurance (OCI) in Hong Kong issued a revised Guidance Note on Money Laundering and Terrorist Financing (GN3) which took effect on 22 December 2010. The revised GN3 supersedes the previous guidance note issued in July 2005.

GN3 sets out detailed guidelines on the policies and procedures that should be adopted by authorised insurers, reinsurers, insurance agents and insurance brokers carrying on or advising on long term business (Insurance Institutions), in respect of customer acceptance and due diligence, record keeping, recognition and reporting of suspicious transactions, and staff screening and training. It should be noted that Insurance Institutions authorised by the HKMA under the Banking Ordinance are subject to the relevant guidelines issued by the HKMA and only some of the insurance-specific requirements of GN3.

Whilst GN3 does not have force of law, the OCI has advised that it expects Insurance Institutions to have in place the policies, procedures and controls set out in GN3 and failure to follow those requirements may reflect adversely on the fitness and propriety of the directors and controllers of the relevant institutions. The OCI may take intervening actions or other administrative sanctions against an Insurance Institution if it has failed to comply with GN3.  

Insurance Institutions should ensure that their internal policies, procedures and controls comply with the revised requirements and are reviewed and monitored regularly.

For further information please contact Marie Kwok in Hong Kong.

The Practice Direction on Mediation in Hong Kong - one year on

The Practice Direction on mediation (Practice Direction 31), which was issued by the Chief Justice in Hong Kong, has now been in effect for over a year. Practice Direction 31 supports an underlying objective of the Civil Justice Reform as it encourages parties to use alternative dispute resolution procedures, including mediation, to settle their disputes. It is relevant to all insurers, irrespective of whether they contemplate resolving their disputes through mediation or are determined to litigate in the Hong Kong court system.

Under Practice Direction 31, parties are, at an early stage in the proceedings, expected to attempt to resolve their dispute through mediation. The court will consider an unreasonable refusal to mediate when exercising its discretion as to costs. Whilst alternative dispute resolution has been common practice for some time, many parties are not prepared to mediate. This is particularly the case where there are ongoing legal proceedings and “without prejudice” negotiations have already taken place. Since the implementation of Practice Direction 31, some parties have refused to mediate or have taken an adversarial approach during the process. Such incidences have resulted in adverse cost orders.

In the recent case, Upplan Co Ltd v Li Ho Ming & Others [2010] HKEC 1257, the parties had agreed in principle to mediation. However, they were unable to agree on the choice of mediator. The parties applied to the court, under Practice Direction 31, asking it to decide upon the appointment of the mediator. The four nominated mediators were regarded by the court as capable of understanding and dealing with the issues concerned. In addition, their respective fees were not widely different and there were no issues as to their availability. Given the objective similarity of the mediators Mr. Registrar K.W. Lung commented that the dispute was simply a consequence of the “passion” of the parties. In considering the choice of mediator, the court will take into account all the relevant objective data, including the nature of the matter and the issue for mediation, the amount involved, the mediators’ knowledge and experience and the availability of the mediators.  Different weight may be given to the various factors. The court will then assess the nominated mediators to determine, on the balance of probabilities, who will be most likely to conduct the mediation smoothly, successfully and economically.  This will lead the court to a rational and dispassionate decision.

The case provides a useful precedent for parties with similar issues.

For further information please contact Wynne Mok in Hong Kong.

The implications of the proposed Voluntary Health Protection Scheme for the insurance industry in Hong Kong

As part of its proposed healthcare reform, the Hong Kong Government plans to introduce a Voluntary Health Protection Scheme (HPS). On 6 October 2010, the Government issued a consultation paper seeking comments from the public and interested parties.

Under the proposal the HPS will provide a standardised and regulated framework for health insurance. Insurers will generally be free to determine the terms of the health insurance policy (subject to certain conditions). This contrasts with the current market practice. The health insurance plans provided by participating insurers under the HPS will have to be standardised and comply with certain core requirements and specifications (HPS Plans), which are designed to provide better protection and advantages to the subscribers, as compared to those offered under existing private health insurance products.  For example, participating insurers cannot turn away subscribers and will have to guarantee that the policy is open for renewal for life. In addition, they cannot refuse to insure high risk individuals.

The proposal is intended to attract more people to join the HPS and be insured on a sustained basis. This will allow public healthcare resources to be better focused on its target service areas, such as providing services to under privileged groups.  Furthermore, HPS Plans have to cover pre-existing medical conditions (subject to waiting period and time-limited reimbursement limits).  Premium for the HPS Plans may also be regulated. This proposal has been set out in the Indicative Premium Schedule, which is attached to the consultation paper (Premium Schedule).  

The consultation period ended on 7 January 2011. In their responses some insurance practitioners expressed concerns about the penetration rate. An actuarially sound risk pool requires sufficient people subscribing to the HPS Plans to allow the risk of high healthcare costs to be spread across a large number of people. For this reason, the size of HPS subscribers is a critical issue affecting the associated risk to be borne by participating insurers.  It is, therefore, surprising that the Government has given no indication that they will enroll all the civil servants onto the HPS.  

The risk level for participating insurers is further escalated by the mandatory acceptance of those in a high-risk pool. Furthermore, the suggested premium set down in the Premium Schedule has been criticised. Respondents have stated that it is not market-focused as it does not take into account payments to shareholders, commission paid to agents and general administrative costs, which taken together are believed to account for approximately 20% of the total cost of medical insurance. It remains to be seen what steps the Government will take in reformulating its proposal.

For further information please contact Winnie Lee in Hong Kong.

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Singapore

MAS issues consultation paper on the Insurance (Amendment) Bill

On 30 December 2010, the Monetary Authority of Singapore (MAS) issued a consultation paper setting out proposed legislative amendments to the Insurance Act and requesting feedback on a draft Insurance (Amendment) Bill.

One of the key proposals set down in the consultation paper is the strengthening of the insurance regulatory framework by allowing MAS to act swiftly when dealing with a failing or failed insurer. The draft Bill gives MAS new powers in various situations where an insurer may be distressed or facing liquidation.  

When dealing with a distressed insurer, the new measures will allow MAS to make a determination for the sale or transfer of assets and liabilities of the insurer or the transfer of ownership. A determination for the transfer of such an insurer’s business may also include the transfer of its non-insurance business. These powers arise in circumstances where MAS is satisfied that the affairs of the insurer are being conducted in a manner which is likely to be detrimental to the interests of policyholders, or that the insurer is likely to become insolvent.

Where an application has been made for the winding up of an insurer, the appointment of the liquidator must be subject to the consent of MAS. The draft Bill also requires the liquidator to sell or transfer portfolios to other insurers where possible.

Where an application has been made to the Singapore High Court for the approval of a proposed scheme of arrangement between an insurer and its creditors, consequential amendments have been made to the Companies Act so that the consent of MAS is required before such a scheme may be approved by the Singapore High Court.

Other changes introduced in the draft Bill concern the enhancement of the Policy Owners’ Protection Scheme (PPF Scheme). Under the PPF Scheme policyholders may claim compensation and enjoy continuing insurance coverage in the event of their insurer failing. The draft Bill will transfer the provisions relating to the enhanced PPF Scheme from the Insurance Act to a new Deposit Insurance and Policy Owners’ Protection Schemes Act.

For further information please contact Anna Tipping in Singapore.

MAS issues notice on reporting of misconduct of broking staff by insurance brokers

MAS issued a notice, which took effect on 1 January 2011, to insurance brokers (including exempt insurance brokers), setting out the responsibilities and reporting requirements of insurance brokers for any misconduct of their broking staff (the Notice).

The Notice requires an insurance broker to report acts involving fraud, dishonesty or similar offences, which it suspects to have been committed by its broking staff, to MAS. Where the insurance broker has not lodged a police report, it is required to explain the reasons for its decision to MAS.

An insurance broker is also required to report cases where its broking staff:

(a) failed to exercise due care and diligence, misrepresented or failed to make adequate disclosure of information to a client;
(b) failed to satisfy the fit and proper criteria set out by MAS;
(c) did not comply with any regulatory requirement relating to the carrying on of insurance broking business under the Insurance Act; or
(d) committed a serious breach of the insurance broker’s internal policy or code of conduct which would render the broking staff liable to demotion, suspension or termination of the broking staff’s employment or arrangement with the insurance broker.

When one of their broking staff is suspected of misconduct, an insurance broker must conduct necessary internal investigations and keep proper records of the investigation process. If a member of the broking staff has committed such misconduct, the insurance broker is expected to take appropriate disciplinary action against them.

An insurance broker that has not reported any conduct in a year is nevertheless required to submit an annual Declaration of Nil Return of Misconduct of Broking Staff.

For further information please contact Anna Tipping in Singapore.

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