Articles by Practice Area
- New international collaboration expands our offering in the Insurance sector
- Legal Update: Is an insurer vicariously liable for an agent’s fraud?
- GL4: Guideline on 'Fit and Proper' Criteria
- D-DAY: Commencement of a New Era of Insurance Regulation in Hong Kong
- Hong Kong Insurance Industry Braces for New Corporate Governance Measures
Items filtered by date: October 2017
By Partner, Chris Hooley
Why should an EU regulation, which only becomes applicable on 25th May 2018 have any relevance in Hong Kong today?
The answer is because the GDPR has a global footprint and so, if you already have a company which is registered within the EU or intend to have one incorporated before 25th May 2018, then the GDPR will apply. The GDPR will also apply to organisations that: (i) do not physically process data in EU but are ‘established’ (i.e. exercise a real and effective activity) in EU, or (ii) do online businesses with representatives in EU countries. If you have customers who are EU citizens, you will have to comply with GDPR too.
Some legislation provides a “grace period” for implementation, but that does not apply to the GDPR. Besides, GDPR is a regulation, not a directive, therefore by 25th May next year, every relevant company must have in place a fully thought through protective environment and protocol for the collection, handling and storage of personnel data. This includes defining access permission, passwords and data encryption.
Most importantly is the requirement that all unencrypted data breaches must be reported to the relevant national data protection authority (Supervisory Authority) within 72 hours, if not, draconin sanctions are applicable and we are told they will be enforced. This reminds us that there is a real need for every company, especially a company which has a European footprint, to have in place proper and detailed protocols to deal with data breaches and cyber-attacks. Billions of dollars are already lost each year through email fraud and now there is an ever expanding threat of cyber-attack on data, whether through malware, ransome ware or the like.
So, does your company yet have in place plans and protocols that can prevent or reduce the risk of any such cyber-attack? Has that yet been considered, because after an attack has taken place, it will be too late?
Typically, there should not only be an initial compliance plan to monitor the risk of any such attack, but there then needs to be an instant response plan. From a legal point of view, there will also be the questions of whether law enforcement agencies are required to investigate and prosecute, so when should the incidents be reported, how should the reporting be performed, what evidence should be collected and how should that evidence be collected? Part of this process will be the required communication response to reduce reputation risk. The World is becoming more and more international and so there is a greater threat to business through an increasing reliance on e-commerce and continuity in cyber space.
OLN in Hong Kong and through its international network of Law Firms can assist in this area. Should you want more information, please do not hesitate to contact Chris Hooley at firstname.lastname@example.org.
What is BEPS?
There is no doubt that Base Erosion and Profit Shifting (“BEPS”) is a hot topic on the international tax policy agenda.
BEPS, which refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, has always been a major concern of international bodies such as the Group of Twenty (“G20”) and the Organisation for Economic Co-operation and Development ("OECD").
The BEPS package, comprising 15 action plans which seek to realign taxation with economic substance and value creation while preventing double taxation, was first launched by G20 and OECD in 2013.
To ensure a consistent and effective global approach, G20 and OECD have called on all countries and jurisdictions to join the inclusive framework for implementation of the BEPS package. Being an international financial centre and a responsible member of the international community, Hong Kong indicated to OECD in June 2016 our commitment to the BEPS package and its consistent implementation.
The below highlights how BEPS has impacted and substantially changed the Hong Kong tax environment.
1) Automatic Exchange of Financial Account Information (“AEOI”)
The Legislative Council has recently passed a bill amending the Inland Revenue Ordinance to further implement the AEOI arrangement.
The AEOI arrangement is depicted below:-
As at the end of July 2017, there are 75 reportable jurisdictions (which are continuously expanding), including the United Kingdom (“UK”) and France.
When fully implemented, the AEOI arrangement will have without any doubt profound impacts on taxpayers. For example, for an UK tax resident who has a bank account in Hong Kong, the following is going to happen:-
- HKIRD will collect and forward the UK tax resident’s financial information to the UK tax authority (the first exchange is due to commence by the end of 2018 on the condition that the necessary domestic legislation would be in place by 2017);
- Other jurisdictions (which have entered into similar AEOI arrangements) in which the UK tax resident has maintained financial accounts will also collect and forward the UK tax resident’s financial information to the UK tax authority; and
- The UK tax authority will tax the UK tax resident on his / her worldwide income based on the information provided (if not already taxed).
Action required by taxpayers
To assess the AEOI impact and reconsider his / her tax residency.
Please refer to our article dated 21 March 2017 for a detailed discussion of the AEOI arrangement.
2) Additional Transfer Pricing documentation requirement
Typical cross-border intercompany transactions of businesses with presence in more than one tax jurisdiction are depicted below:-
(1) The administrative function (such as IT, human resources etc) will be managed by the Group Company on a centralised basis and the Group Company will charge its overseas subsidiaries (HK Company and other overseas company) management fees for the provision of the administrative services.
(2) In cases where the Group wishes to take advantage of the lower tax rate in Hong Kong (for example, in case that the Group has an active business in Japan which has an effective tax rate of 34% compared with the effective tax rate in Hong Kong of 16.5%), the Group can arrange for the Hong Kong Company to own the relevant intellectual properties of the Group and impose royalties fee on the grant of the license to the Japanese company. That way the profit generated by the Japanese company will be diverted to Hong Kong Company.
To tackle non-arm’s length intercompany transactions and to counter BEPS, the Hong Kong Government has proposed to introduce a new 3-tiered standardised transfer pricing documentation as per below:-
(1) Local File: Enterprises with cross-border intercompany transactions would be required to keep a local file which provides detailed transactional transfer pricing information such as details of the transactions, amount involved in the transactions and a transfer pricing analysis.
(2) Master File: Enterprises with cross-border intercompany transactions would be required to provide a high-level overview of the group, including documenting the global business operations, transfer pricing policies and global allocation of income.
(3) Country-by-country Report (“CbC Report”): A CbC report should be filed by the ultimate parent entity of a multinational enterprise (“MNE”) in its tax jurisdiction which sets out the amounts of revenue, profits and tax paid as well as certain indicators of economic activity such as number of employees, stated capital, retained earnings and tangible assets for each jurisdiction in which a MNE operates.
Accordingly, for the above group structure, unless they qualify for the exemption, the local operations in the overseas companies and Hong Kong will each require to submit a local file and a master file. And the parent company will need to submit the CbC report.
Exemptions to the 3-tiered standardized transfer pricing documentation
For local and master files:
Upon satisfying 1 of the 2 following exemptions:-
(a) Exemption based on size of business
An enterprise which satisfies any 2 of the 3 below conditions will not be required to prepare local and master files:-
- Total annual revenue not more than HK$200 million;
- Total assets not more than HK$200 million; or
- Not more than 100 employees.
(b) Exemption based on related party transactions
If the amount of a category of related party transactions for the relevant accounting period is below the proposed threshold, an enterprise will not be required to prepare a local file for that particular category of transactions:-
- transfer of properties (other than financial assets and intangibles): HK$220 million;
- transaction of financial assets: HK$110 million;
- transfer of intangibles: HK$110 million; and
- any other transaction (e.g. service income and royalty income): HK$44 million.
If the enterprise concerned is fully exempted from preparing a local file, it will not be required to prepare the master file either.
For CbC Reports:
- Annual consolidated group revenue ≤ EUR750 million (i.e. approx. HK$6.8 billion)
More on CbC Reports
CbC reports are to be exchanged automatically between tax authorities of different jurisdiction of which Hong Kong has concluded a Comprehensive Double Taxation Agreement (“CDTA”) and and Tax Information Exchange Agreement ("TIEA") with, including China and the United States.
Action required by taxpayers
- To review the arm’s length basis of the intercompany transactions and conduct transfer pricing analysis.
(3) No More “Tax Treaty Shopping”?
The development of a multilateral instrument
It is beyond doubt that “tax treaty shopping” is an important source of BEPS. Rather than making amendments to each bilateral treaty (with more than 3,000 bilateral treaties around the world), the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Multilateral Instrument”), one of the outcomes of the BEPS Project, operates to modify tax treaties between two or more parties to the Multilateral Instrument in a synchronised and efficient manner. It will not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the treaty; instead, it will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures.
The Multilateral Instrument, however, does not modify all tax treaties in the same manner. Apart from the minimum standards (namely the prevention of treaty abuse including defining a company’s taxable presence in a tax jurisdiction (Action 6 of the BEPS action plans) and the improvement of dispute resolution (Action 14 of the BEPS action plans)) which can be satisfied in different ways, the Multilateral Instrument is a flexible instrument which will modify tax treaties according to a jurisdictions’ policy preferences with respect to the implementation of the tax treaty-related BEPS measures.
As of 11 July 2017, 70 jurisdictions (including China and Hong Kong) have signed up for the Multilateral Instrument, with additional jurisdictions expressing their intention to sign the Multilateral Instrument or already preparing for signature of the Multilateral Instrument.
How does the Multilateral Instrument impact on the CDTAs?
Apart from the double tax arrangement with China, all of the CDTAs with 36 countries would be covered by the Multilateral Instrument.
In brief, Hong Kong has chosen to-opt in with respect to the provisions of the Multilateral Instrument that represent the minimum standards and has chosen to-opt out with respect to other provisions that are not mandatory. In particular, Hong Kong has indicated that it will adopt the principal purposes test rule which means that the treaty benefit should not be available where one of the principal purposes of arrangements or transactions is to secure a benefit under a tax treaty and obtaining that benefit in these circumstances would be contrary to the object and purpose of the relevant provisions of the tax treaty.
Action required by taxpayers
- To assess whether their business operations in Hong Kong do have proper business purposes in order to continue to enjoy the treaty benefits available under the relevant double tax agreements.
For a detailed discussion or any enquiry, please contact one of our members of the Tax Advisory team.
By Registered Foreign Lawyer, Caroline Choi
Entertainment journalists are not lacking for work, as juicy gossip about celebrity breakups continue to make headlines across the globe. Last year's most surprising split being the divorce of mega superstars, Brad Pitt and Angelina Jolie. There have been numerous reports about what caused this picture-perfect relationship to sour, including allegations of misconduct against the children and abuse of alcohol and drugs. Since initial news broke of the split, Brad Pitt and Angelina Jolie have made great strides by keeping details of the divorce under wraps and agreeing on a settlement. More recently, there is even talk of a possible reconciliation!
In case of Brad and Angelina, what we do know is that when Angelina Jolie initiated the divorce proceedings and her Petition for Dissolution requested “sole physical custody” of the couple’s six children. This is a significant detail because California laws (and most other states across America) encourage “joint custody” of children. An individual who requests sole physical custody for one reason or another usually makes this request because of concerns about the other parent’s ability to care for the children.
While we may never know Angelina Jolie’s real reasons for requesting sole physical custody, the important point is that California law, like most states in the U.S., encourage joint legal and physical custody of children. However, not all jurisdictions across the globe follow these same standards. As a California attorney, now practicing as a Registered Foreign Lawyer (California, USA) in Hong Kong, I have discussed the differing child custody laws between California and Hong Kong with Stephen J. Peaker, head of the Family Law Department at Oldham, Li & Nie (OLN) and a fellow of the International Academy of Family Lawyers (IAFL). To begin, let’s take a look at what joint legal and physical custody means in California and why it’s so important for the health of families of divorce:
1. California Favors Joint Legal and Physical Custody: Joint legal custody means both parents agree to share in the rights and responsibilities to make decisions relating to the health, education and welfare of a child. Joint physical custody means both parents agree to equally share in the physical care of a child. California law encourages divorcing parents to share responsibilities in both the legal and physical custody of a child because parents who share this responsibility are ultimately working towards the “best interests” of a child. The ultimate goal is to ensure the health and success of the child. Many other countries, including England, Scotland, Australia and New Zealand encourage this model of joint parental responsibility and as family law practitioners, it is our hope that other countries will follow this model. Co-parenting, while difficult at times, encourages healthy relationships when a family unit is broken.
2. Legal Custody, Physical Custody & Control In Hong Kong: In Hong Kong, parents are usually given joint legal custody, but with physical care and control to one parent and with reasonable access to the other parent. This is currently done without reference to joint parental responsibility, which fails to encourage separated parents to act collaboratively in the best interests of the child. When joint custody, care and control is given to one parent, too much authority is given to one individual which can sometimes result in the reasonable access parent having less contact with the child and a diminishing role over time despite having joint custody. This issue is especially important in Hong Kong because many local citizens have dual nationality (following the transfer of sovereignty in 1997 from the United Kingdom to China) and many foreign nationals live and work in Hong Kong. When these citizens with dual nationality divorce in Hong Kong, they are in a system where the best interests of children are the primary focus, but where the law is historically the same law as the United Kingdom had prior to the enactment of the 1989 Children Act. Fortunately, Hong Kong courts are making great strides and moving forward towards a more child-centered model. This is good news for parents who wish to continue to nurture a healthy relationship with the children after divorce.
3. Steps Towards Joint Parental Responsibility Focus: The Law Reform Commission of Hong Kong has published a report on “Child Custody and Access” which has been a point of discussion since March 2005. The primary focus of the 72 recommendations in the report is to emphasize continuing responsibility of parents towards their children even after divorce. This is already evident in Hong Kong courts, which are now making more orders for “joint custody” which divorcing couples in California are already accustomed to. In Hong Kong’s premier radio broadcast show called Backchat on RTHK radio, Stephen Peaker, along with other key players in the family law community in Hong Kong discuss why this is significant for families in Hong Kong. Essentially, this new reform is significant because when parents decide to no longer remain as life partners, the children are no longer deprived of having the love and care from both parents.
4. Input from Children: In custody proceedings in California, a child may be given the opportunity to speak his/her mind about preference as to whom he/she would like to live with. Many judges will consider a child’s preference if the child is at an age of maturity and emotion. Hong Kong’s move towards a child-centered focus will now allow a child’s preferences to be brought into the system. Similar to the appointment of minor’s counsel in California, Hong Kong already has a system for separate representation of children via the Official Solicitor. Stephen Peaker praises these reforms and the role of the Official Solicitor as this is an important matter for children and their families. Mr. Peaker anticipates the Hong Kong government will do their best to bring this to the table as soon as possible. Since 2015, the Hong Kong government and the Chief Justice have promoted the introduction of the law as soon as possible, which is a very welcome move.
No matter where you are located across the globe, the focus in a divorce involving children should always be the “best interests” of the children. Even a child-centered model (as seen in California) does not work without the full cooperation of parents in divorce. As I stated in my article about co-parenting, you can take steps to encourage successful co-parenting with 1) regular communication; 2) seeking assistance from a professional when communication is an issue and 3) avoid court litigation because a court can’t always make the best decision for you and your family. Parents working together is always the best option for a healthy future.
By Senior Associate, Carmen Tang
1. What is a Data Access Request (“DAR”)
In the course of business dealings, your company may have collected, held, processed or used the personal data of employees or other individuals. These people are entitled to request your company to supply them with a copy of the personal data held (the “requestor”). This is called a data access request (“DAR”) and is a core right contained in the Personal Data (Privacy) Ordinance (“Ordinance”).
2. Complying with a DAR
a. When your company receives a DAR, it should:
(i) ascertain the identity of the requestor;
(ii) assess whether it holds the relevant personal data; and
(iii) respond within the statutory time limit.
b. A requestor is not entitled under a DAR to access data which is not personal data or personal data not belonging to him. To constitute personal data of an individual, the data must firstly relate directly or indirectly to the individual. Secondly, it must be possible from such data to directly or indirectly determine the identity of the individual.
For example, in a performance appraisal report where the appraising officer states his opinion about the aptitude and performance of the appraisee, such opinion will constitute the personal data of the appraisee. On the contrary, recorded opinion about the performance of a property management company expressed by an owner during an owners’ meeting will generally not constitute the personal data of that owner.
Holding relevant Personal Data?
c. If your company holds the relevant personal data, it should supply a copy of the requested data in an intelligible form and within 40 calendar days after receiving the
DAR, unless specific exemption applies. If the Privacy Commissioner concludes that there is a breach of the Ordinance after investigation, he may serve an enforcement notice on the data user concerned directing it take steps to remedy the situation and where appropriate, to prevent any recurrence. Non-compliance of an enforcement notice is an offence which may result in a fine and imprisonment.
d. If your company does not hold the requested data, it is still required to inform the requestor in writing within the 40-day time limit that it does not hold the data.
e. If your company has already destroyed the requested data it is required to inform the requestor that it no longer holds the data. To avoid any suspicion of bad faith, your company may explain the reason for destroying the data to the requestor.
Should you provide “All personal data”?
f. Where the description of the requested data is too generic, especially where there have been extensive dealings between your company and the requestor during which a large amount of personal data has been generated, your company should seek clarification from the requestor . If the requestor fails to supply the information reasonably requested for locating the requested data, your company is entitled to refuse to comply with the DAR.
g. Having said that, your company may not simply rely on the fact that the request is made in too broad or generic terms to refuse to comply with a DAR. If you are aware of and can reasonably locate the requested data without any further specification from the requestor, the data user should comply with the DAR.
3. Charge for Complying with a DAR
a. Your company may impose a fee for complying with a DAR which should not be excessive, and should not charge a fee on a commercial basis. It should clearly inform the requestor what fee, if any, will be charged as soon as possible and in any event not later than 40 days after receiving the DAR.
b. Fees that will be considered excessive or not directly related to and necessary for the compliance of a DAR could include fees that exceed the cost of compliance, e.g. costs of seeking legal advice in relation to the Ordinance or inclusion or your company’s administrative or office overheads.
The Commissioner’s office has provided examples on fees that may be charged for complying with a DAR in its Guidance Note. Your company may charge the direct costs attributable to the time spent by its staff and the actual out-of-pocket expenses for locating, retrieving and reproducing the requested data for complying with a DAR. For example, if a clerical assistant has spent five hours on retrieving and photocopying the requested data in the course of handling a DAR, the calculation of the labour costs incurred is the hourly rate of his remuneration (including salary and fringe benefits) multiplied by five. Your company may charge for the labour cost attributable to the time spent on extracting or editing the requested data, provided that such tasks are directly related to and necessary for compliance with the DAR.
4. Refusing to Comply with a DAR
a. Your company should refuse to comply with a DAR if:-
i. it is not supplied with sufficient information to identify the requestor;
ii. it cannot comply with the request without disclosing the personal data of a third party; or
iii. where compliance with the request is prohibited under the Ordinance or any other regulation.
b. Your company may refuse to comply with a DAR if the request is not made in writing using either the Chinese or English language.
c. Your company is obliged to give written notice and reasons for refusal to the requestor within 40 days from receiving the DAR and is also required to keep a log entry containing the particulars of the reasons for the refusal of the DAR for four years.
By Consultant, Adelina Wong
Financial technology (fintech), the use of new technology by financial institutions, has shaken up the banking industry in areas such as foreign exchange, mobile payments and peer-to-peer (P2P) lending. Similarly, the use of technology in the insurance sector is accelerating and will have a potentially transformative effect on the development, marketing, sale, underwriting and administration of insurance products in the near future. The term “Insurtech” has been coined to describe the application and use of technology in insurance.
In the insurance area, technological advancement is being used to create a more direct and efficient relationship between insurance companies and their retail customers. Potentially, this will lead to a better customer experience. Customers can benefit from lower premiums and greater product choice as insurers use big data to improve risk pricing and offer products (including online sales of insurance) customized to individual needs. Automation of policy administration and claims handling processes using blockchain technology can lead to smoother and quicker processing of insurance claims, a primary concern for policyholders. At the same time, insurers can benefit from the greater reach and lower cost of a digital sales platform. Digital record keeping and settlements can also increase efficiency and reduce costs and fraud risk.
Current notable developments in InsurTech include the following:
1. Application of blockchain technology in record keeping and policy administration;
2. Marketing and sale of insurance on digital platforms; and
3. Application of telematics technology and big data to underwriting and loss prevention.
Blockchain is the technology underpinning the cryptocurrency Bitcoin, and allows the creation of a distributed ledger that records transactions on a permanent global database on computer servers around the world. These servers work as nodes, with each node holding a complete copy of the data which is stored in tamper-proof blocks (joined in unbroken chains) on the common ledger. In this way, each member of the network has a complete, traceable record of all transactions and information stored in the ledger, which cannot be changed or added to without the consent of everyone on the network.
In insurance, an industry which heavily relies on documentation and databases, blockchain has the potential to increase efficiency and improve transparency by allowing parties to insurance and reinsurance transactions to share data and documentation with each other in real time.
Applications or programs can also be built on blockchain to allow automatic execution of contracts composed in computer code (so-called “smart contracts’) which are stored on the shared ledger. Such smart contracts have the potential to greatly increase the speed and efficiency of claims processing, as well as alleviating fraud risk since the blockchain ledger provides immutable records and tracking. As an example, life insurance smart contracts can be programmed in future to automatically transfer life insurance proceeds to the beneficiary’s bank account on the policyholder’s death, verified by an automatic real-time check of the online death register.
Online Marketing & Sales
Going beyond policy administration, new digital platforms are being launched for the marketing and sale of insurance products. Price comparison websites are already common, particularly in the automobile insurance area. Taking digital distribution a step further, pure online insurance sales platforms are emerging with insurers directly selling to consumers with no intermediary or human interface. In particular, online-only insurance companies are starting to take off in China, with the launch of Zhong An, an online-only property and casualty insurer, in 2013. Backed by Chinese tech giants Alibaba Group and Tencent Holdings, Zhong An is the first and only company in China to date with an internet insurance license. It has used its digital platform to sell tailored insurance for particular products/services to the mass market, such as shipping return insurance for online purchases on Taobao and flight delay insurance for online bookings on CTrip via links embedded on the platforms of its online market partners. From inception through to the end of 2016, Zhong An has sold over 7.2 billion policies and serviced some 492 million customers. It just raised US$1.5 billion in September 2017 by listing on the Hong Kong Stock Exchange in the city’s biggest fintech offering to date.
Telematics & Big Data
Technology is also being used to inform underwriting decisions, including both risk assessment and pricing. In particular, telematics, the “Internet of Things” (IoT) technology that collects, stores and transmits data about the location, usage, performance and operating status of devices, machines and products, is being used by insurers for ongoing risk profiling and monitoring of customers, allowing them to customize premiums and improve risk pricing. For example, many auto insurers in the U.S. and Europe now offer premium discounts to customers for installing telematics devices in their cars (which track factors such as speed, braking, acceleration etc.) and then driving in a certain manner. Similarly, some health insurers are giving customers free fitness tracking devices and then offering to lower their premiums if they meet certain exercise requirements. Home insurers are likewise offering premium discounts to customers who install cameras, sensors, smoke detectors, leak detectors and other IoT devices in their homes. In this way, customers are incentivized to reduce their health and accident risks and avoid claims under their insurance.
Risks and Challenges
In the area of telematics, the primary challenges relate to privacy and security. Even with the incentive of premium discounts, customers may be reluctant to share private information with IoT device manufacturers and insurance providers, particularly given security and hacking concerns. To encourage broader customer take-up of IoT devices, better security will have to be built both into the devices themselves and the software applications and network connections linking the devices. There is also concern about what companies will do with the information collected, much of which constitutes personal data subject to regulation. For example, collected data could potentially be used to decline insurance altogether to high-risk customers. Thus, regulators will no doubt closely monitor how insurers collect and use IoT data in underwriting having regard to the fair treatment of customers.
Online marketing and sales of insurance will likewise be subject to regulatory scrutiny. While more straightforward products such as car and property insurance may quite easily be sold online, life insurance is a different proposition. There are stringent regulatory requirements in most jurisdictions (including Hong Kong) regarding steps which must be taken by manufacturers and distributors of long-term insurance products in the marketing and sales of such products in order to ensure protection of the best interests of customers. Requirements regarding undertaking a thorough suitability assessment of the customer’s insurance needs and financial circumstances and clear communication of complex product features and risks may be hard to meet via an online platform.
Turning to the use of blockchain technology for policy administration, insurers can only take advantage of it after they digitalize and consolidate all of their contracts and data. The technology itself also presents regulatory challenges since the blockchain is not located in any one jurisdiction making it difficult to regulate. On the other hand, the transparent nature of blockchain makes the data available to those on the network and risk monitoring presumably more straightforward.
Where is Hong Kong?
Following in the footsteps of Singapore and the UK, the Hong Kong Insurance Authority (IA) launched an “Insurtech Sandbox” on September 29, 2017. This Sandbox will allow authorized insurers in Hong Kong to undertake pilot runs of new Insurtech products/applications without the need to get full regulatory approval provided that the initiatives in question meet certain criteria (which include having adequate safeguards to protect customers’ interests during the trial). A similar pilot scheme was launched by the Hong Kong Monetary Authority over a year ago under which banks in Hong Kong have been running trials of their new fintech products. It is expected that insurers will follow suit now that they potentially have a safe space try out new technologies without taking on the full cost and regulatory burden of IA supervisory requirements.
At the same time as launching the Sandbox, the IA introduced a pilot scheme “Fast Track” for applications for authorization from applicants who will carry on insurance business in or from Hong Kong using solely digital distribution channels – i.e. without the use of conventional channels involving agents, brokers or banks. The intention is to promote direct digital distribution of insurance which it is envisaged will bring benefits to customers in terms of new products and cost efficiency.
Insurtech has been slow to take off in Hong Kong, partly due to wariness from insurers and their traditional reliance on middlemen (agents and brokers) for distribution of insurance products. Hong Kong currently has approximately 100,000 individuals who are registered either as individual insurance agents, or responsible officers/technical representatives undertaking insurance agency or brokerage business in Hong Kong. However, increased online sales of insurance by both traditional and newly authorized online-only insurers will allow insurers to interact directly with customers, allowing them to save on agency/brokerage commissions and reduce operating and distribution costs. Reduction of the need for middlemen in the industry will likely lead to restructuring and redundancies.
On the other hand, and as warned by the IA in relation to the Fast Track scheme, not all insurance products are suitable to be sold online, and the IA’s expectation is that all of its existing “policyholder protection measures should remain intact”. Stringent regulatory requirements in relation to the marketing and sale of long-term insurance may be a significant barrier to online distribution of life insurance.
Nonetheless, the advent of the Insurtech Sandbox and Fast Track application process for online insurers will likely draw more technology firms into the insurance sector, following the lead of Alibaba Group and Tencent Holdings which collaborated to set up Zhong An. Traditional insurers will face competition from the new Insurtech startups and have already begun developing and investing in technology so as not to be left behind. In this changing Insurtech landscape, the challenge for regulators such as the IA will be to develop a regulatory culture which protects customers but at the same time is flexible enough to support new Insurtech products and services.