The Hong Kong Federation of Insurers (HKFI) today (Tuesday, 20 April 2004) announced that it does not support the need to establish any further Policyholders' Protection Funds (PPF) in Hong Kong because:

i)

At present, Hong Kong has a sound regulator. The Insurance Authority has been in existence for more than 20 years. There was only one major insurance insolvency in the last two decades, which was a direct result of the insolvency of the parent company in Australia. As such, there is no sound basis and is not cost efficient to request the insuring public to pay extra to set up PPFs that would offer only limited protection. With its effective regulatory power and the data collected from insurers, the Insurance Authority is already in the driving seat to monitor and prevent insurance company insolvency.

ii)

In 2003, the Korean Government abolished the "Policyholder Protection Deposit" scheme as it considered such a scheme redundant following the introduction of solvency margin requirements because solvency margin is a major criteria for supervision against which insurers' financial soundness is measured.

iii)

Moreover, it should be noted that PPFs in some overseas jurisdictions were introduced long time ago when there were no solvency margin requirements. For example, in 1974 PPFs were introduced in the UK when there was no solvency margin requirements in place at the time.

i)

Life insurance promises life and disability protection measured in the form of the sum insured at some time in the future. Such protection is normally many more times than the premium paid in total and can only be fully realized when there is a claim on the insurance contracts at some time in the future.

ii)

It is the last resort for most policyholders for financial relief to alleviate economic hardship when something unfortunate happens. It is unacceptable to a policyholder in dire need to be told he/she has to queue up for reduced or no compensation when, on top of the policy premium, he/she has already been charged extra for the additional supposed cover of a PPF.

iii)

PPFs have the pre-funded and post-funded models. Both of them have certain drawbacks. In the pre-funded model, policyholders who have been paying extra for the additional protection may find their funds being used to pay for the financial loss of a future generation when their own contracts have long expired. This is unfair and inequitable to the current generation of policyholders.

iv)

In the case of the post-funded model, the very act of collecting PPFs contribution may trigger insolvency in a bad economic climate resulting in the Domino effect which could trigger even more insolvency contrary to the PPF's objective. For example, in 2003, some German insurance companies that were marginally solvent found themselves become technically insolvent when they had to pay the PPFs contribution. For this very reason, German insurers resisted the introduction of their proposed PPF schemes.

• The objective to set up PPFs to provide a safety net for policyholders in case of insurer insolvency is not the cure to the problem. We believe that prevention of insurer insolvency is the solution.

• PPFs have many shortcomings:

"We urge the public and Legislators to concentrate on the efficacy and cost-effectiveness of the proposal, raise queries and thoroughly consider such implications before arriving at any conclusion concerning the establishment of the Policyholders' Protection Funds," said Mr Edward Lau , Chairman of the Hong Kong Federation of Insurers.

Enclosed is the submission of the HKFI regarding the Consultation Paper on the Feasibility of Establishing Policyholders' Protection Funds in Hong Kong. (PDF format)