• Some more about our logo
• Insurance Beyond Year 2000 in Asia
• Accounting Standard for Investments in Securities
• President’s Message
• Legislative Highlights
• Institute News

SOME MORE ABOUT OUR LOGO

The original design concept of the logo evolves around its two initials – The I.I. – Insurance Institute.

The two I’s was designed in a symmetrical and three-dimensional layout using color contrast and formed into the shape of an arrow. The tip of the arrow pointed upwards.

The choice of using lighter and darker shade of green was adopted, basically to reflect the liveliness and the continuous growing process of the Institute, and green color is environmental friendly.

The two I’s basically represents the Insurance Institute.

Alternatively, as the aim of the Institute is to ensure continuous development and to improve the cutting edge of its members and practitioners and to provide quality services to the ultimate consumers, there is a close link between Insurers and the Insured and the two I’s can also be taken as symbolic of the relationship between Insurer and the Insured.

The upward pointing arrow symbolizes the institutes always strive to move ahead.

Finally, the use of the lighter and darker shades of green in the two I’s is a reflection of the Yin Yang Symbol and embraces an element of harmony balance and tranquility.

The Logo was originally designed by Mr. Peter W.T. Wong who has been in the Insurance Industry throughout and is now the Managing Director of Toplis and Harding (Hong Kong) Ltd.

Insurance Beyond Year 2000 in Asia

Herebelow is the Keynote Speech delivered by the Commissioner of Insurance at the Third Annual Conference of Asia-Pacific Risk and Insurance Association held on 19.7.1999.

"Good Morning, Ladies and Gentlemen,

I am honoured to be invited to address this distinguished gathering of scholars and insurance practitioners coming from different countries in the Asia Pacific Region, I would like to share with you some of my observations of the insurance industry in Asia beyond Year 2000.

In the beginning of the next millennium, insurers in the region will face a number of challenges.

The first challenge is how to survive the soft market conditions in respect of non-life business which have persisted for several years and aggravated by the Asian economic turmoil. In Hong Kong, the gross premiums from these lines of business have been on the decline since 1995 and last year dropped by 8% to just over US$2.3 billion. The competition among insurers has become so tense that offers of "cut throat" premium rates are not uncommon. Insurers have been trying hard to maintain their market share by satisfying as far as possible the expectations of the policyholders which are rising as a result of increasing awareness of their rights and bargaining power. The severe competition has led to an alarming underwriting loss of about US$100 million for the industry as a whole.

The second challenge is the structural transformation of the insurance market as a result of rapid technological progress and the increasing sophistication of the policyholders, who now actively seek alternative channels, such as internet and telesales, to maximise their value for money. The competitiveness of premium rates is invariably the key factor for their decisions regarding risk management and financing. To explore new markets, many insurers make great efforts to penetrate into various potential client sectors and launch new and innovative products. The traditional agent-driven face-to-face selling practice is no longer the only distribution channel.

The convergence of financial services i.e. banking, insurance, investment and asset management poses a third challenge to insurers. Increasingly, life insurance policies offer investment opportunities that compete with mutual funds and unit trust. "Bancassurance" is becoming more and more popular. Insurance agents now face competition not only from the internet and tele-marketers but also from banks and a new breed of financial advisors. The latter sell a variety of financial products and services including financial planning, fund management and insurance. The demarcation line among the traditionally distinct and separate financial services is blurring.

The fourth challenge comes from the liberalisation of the Asian insurance markets. The need for additional capital to insure the risks arising from national development has reinforced the liberalisation and deregulation process. Besides Korea and Japan where the regulatory authorities are changing their laws to allow domestic insurers to look for foreign partners. Thailand and Indonesia are also relaxing their foreign ownership restrictions. In Hong Kong, we have always allowed free market access and full foreign ownership – the ultimate goal of the World Trade Organisation – for years. How to cope with the more competitive market environment caused by entry of foreign insurers through technology absorption, professionalisation of insurance practitioners, and application of risk and financial management skills is going to be a great challenge not only to domestic insurers but also to regulators.

In Hong Kong, there are at present 207 insurers. Competition in the industry is intense and will remain so beyond the Year 2000. Acquisitions and mergers will continue to take place as the industry consolidates. Insurers who are under-performing will be driven out of business. The number of insurers will decrease and large insurers, who are able to benefit from the economy of scale, will emerge. A classic case of "survival of the fittest".

With the integration of the financial services, more financial one-stop shops will be set up offering a full range of banking, insurance, pension and investment products. Banks, investment houses and insurance companies will form strategic alliances to explore the merging markets.

The 21^st century will be an age of Information Technology. Computers will become an indispensable part of our daily lives. With the increasing usage of internet at home, direct sales through electronic means (e.g. e-commerce) will be employed by insurers to market their products, alongside their traditional agency distribution networks.

As regards reinsurance, alternative risk transfer and risk securitisation (e.g. CAT bonds) will be more commonly used as risk management tools. These tools of risk financing will enable insurers and reinsurers to gain access to the capital markets thereby expanding their underwriting capacity.

Life insurance is expected to be rich in growth potential in Asia. Take Hong Kong for example, at present, only 3.4 million people, out of a population of 6.3 million, have taken out life insurance policies. The penetration rate, which is just over 50%, is much lower than those of the developed countries like the United States and Japan. There is ample room for expansion. Life insurance business has grown by about 20% annually in the last 5 years in Hong Kong. The momentum of growth will be sustained in the foreseeable future. The implementation of the Mandatory Provident Fund schemes will generate a large amount of funds by the end of year 2000 (from US$2 billion up to US$8 billion upon maturity). The life insurance industry is expected to get a fair share of this market. I understand that the life insurance business is also growing rapidly in other Asian countries, particularly Mainland China.

With the rapid development of the insurance markets, the demand for insurance expertise will continue to rise. In Hong Kong, we established a steering committee last year to conduct a review of the need for, and feasibility of, setting up a Financial Services Institute to co-ordinate the training of professionals for the financial services sector. We have also taken steps to promote degree-level insurance education. As some of you are already aware, the Lingnan College, soon to be designated as Lingnan University, has launched a degree programme related to insurance and risk management. This programme embraces not only insurance but also other business subjects so as to equip our future insurance executives with all-round commercial knowledge.

Equally important is the education of the insurance intermediaries who are on the front-line and constitute an overwhelming majority of the insurance practitioners. In Hong Kong, in order to ensure the high professional standard of insurance intermediaries, we have initiated earlier this year an Insurance Intermediaries Quality Assurance Scheme. Under the scheme, insurance agents and brokers are required to be properly trained and qualified through a public examination. They will also be required to attend continuing professional development programmes as a condition for re-registration.

So far I have only talked about the challenges facing the insurance industry in Asia. I would also like to say a few words on the likely developments in respect of regulation of the industry in the 21^st century.

To facilitate the development of the insurance market, a sound regulatory framework is required to maintain systemic stability and to protect the interests of policyholders. It is necessary to strike a reasonable balance between the market mechanism and regulation, and to keep the compliance costs low.

Regulators, sooner or later, will have to be properly equipped to handle electronic submission and dissemination of financial information regarding the insurance industry. They are also required to keep abreast of new risk management and financing tools as well as market practices through continuing professional development training. The industry will be required to be more transparent in order to enable the insuring public to gain access to the financial and statistical information relating to the operation of individual insurers. Market transparency is crucial to the consumer protection as it enables policyholders to make better informed decisions.

As insurance becomes more intricately linked with other financial services, greater co-operation among the financial regulators, both locally and internationally, is not just desirable but necessary. Effective cross-border supervision of multinational insurance companies requires information exchange and technical cooperation between regulators. In Hong Kong, we will continue to participate actively in the activities of the International Association of Insurance Supervisors and to maintain close liaison with our counterparts, in particular the newly established China Insurance Regulatory Commission.

As a closing note, I wish that all participants would find this conference useful and enlightening, and the visitors from overseas a most enjoyable stay in Hong Kong.

Thank you."

Alan Wong, JP
The Commissioner of Insurance

In Hong Kong, it is fair to say that insurance companies have historically had a lot of latitude in accounting for their investments in securities… latitude which led to a variety of different accounting practices being adopted…

So perhaps not too much cheering on the issuance of SSAP 24!

Issued in April 1999, SSAP 24 is the first Hong Kong Accounting Standard to deal specifically with investments in securities (other than subsidiaries/associates). The key requirements prescribed by the standard include:-

• Classification and measurement
• Treatment of gains and losses
• Accounting disclosure requirements

SSAP 24 applies to all Hong Kong insurers (as they now all need Hong Kong GAAP accounts), as well as all Hong Kong incorporated intermediaries. It will be effective for periods beginning on or after 1 January 1999 – which for many will be the coming 31 December 1999 year-end.

The new standard prescribes a consistent framework for accounting for investment securities. However, for securities other than those categorised as Held-To-Maturity, there is a choice of either the Benchmark or Alternative treatments.

 (reference should be made to SSAP 24 for detailed guidance on classification and measurement, and determining whether impairment provisions are required)

Key considerations include

• Market perception

There are two features of the Alternative treatment which might appeal to insurers, namely:-

1. In determining investment security carrying values, fair value bases might result in a stronger balance sheet than the cost basis.
2. For "Non Trading Securities", normal fluctuations in fair value are recognised in a revaluation reserve, thereby "insulating" the profit and loss account from market volatility.

• Tax

Whichever treatment is adopted, there could well be tax implications. For example, under the Benchmark treatment, unrealised gains on "Other Investments" are taken to the profit and loss account, which could accelerate their taxation.

• Solvency

The Alternative treatment requires all non Held-To-Maturity investment securities to be carried at fair value. This may lead to a higher reported solvency than the Benchmark treatment, which requires "Investment Securities" to be carried at cost. Due consideration must also be given to the effects of the Insurance Companies (General Business) (Valuation) Regulation.

• Administration

Against using the Alternative treatment, all unlisted investments are required to be carried at fair value, prompting the need for valuations to be performed every time accounts are prepared. The administrative burden of performing this exercise on unlisted investments should not be overlooked. Under the Benchmark treatment, unlisted investments classified as "Investment Securities" may be carried at cost less provision for impairment in value, which might be easier to determine.

SSAP 24 could have significant consequences for your business. It may affect your tax position and (potentially) solvency, as well as placing an additional administrative burden on your accounting department at year-end. More importantly, it has implications for the impression which your financial statements will give to the market (and rating agencies).

If you have not done so already, seek professional advice now!

Peter Whalley
PricewaterhouseCoopers
Financial Services Division

 P.S. This article is a brief overview only and should not be taken as a substitute for professional advice or used as a basis on which to formulate business decisions.

President’s Message

It has been almost three months since I have been elected to be the President of the Institute. A lot of things have been happening that I would like to brief you all in this corner.

In our application for Services Support Fund from the Government in the development of Local Insurance Qualification, sadly to say that we have failed in our 2^nd attempt even though we have been short-listed for phase II review. By no means, we have been defeated or given up our hope in this project. Our Local Qualification Committee will continue working even harder in looking for support and avenues in making this project a success. Taking this opportunity, I would like to sincerely thank our Committee Chairman Mr. Elex Chan together with his devoted and hard working team Ms. Irene Wong and Mr. Graham Norris. Also, I would like to thank our Commissioner, Mr. Alan Wong and our Legislator, the Honorable Mr. Bernard Chan, for their valuable support, advice and encouragement.

In April, Our Immediate Past President 1998/99 Mr. Jackie Chun attended the "99 Mainland, Hong Kong Insurance Conference" in Beijing and delivered a paper on behalf of the Institute. In May, we had Ms. Joan Fitzpatrick, CEO of Australian Insurance Institute visiting us. In June, together with Fire Insurance Association, we held a seminar on "Drainage system". In July, we will co-host with Lingnan College the 3^rd Annual Conference of Asia-Pacific Risk & Insurance Association at Royal Plaza Hotel and Lingnan College.

We will soon go into the next millennium. Insurance industry, with no exception, will also undergo changes to keep up with this ever rapidly changing world. As service industry, education is of basic importance to promote high professional standard. Insurance industry has in the past contributed about 4% of GNP in Hong Kong and it is about time that we get the same recognition as the other industry in the financial services such as banking, securities etc. from the government and the public. We may not be the most important body in this field but we aim at upgrading the standard of insurance practitioners with our limited resources. Our current target is to encourage study on insurance and to certify our own "Qualified people" through examination at a professional level to be recognized by the public and overseas. This can only be achieved with your continued support.

Peter Leung
President

Starting from this issue, this column will present to you the latest insurer-related developments in the Legislative Council. For further details you may refer to my monthly newsletter or contact my office at 2545 0496.

The heartening exemption on life insurance proceeds from estate duty – as announced by the Financial Secretary in the 1999-2000 Budget – officially passed the Legislative Council on 8 July 1999. The new measure has come to effect from 1 April 1999 upon the enactment of the Public Revenue Protection (Revenue) Order 1999 as a temporary measure. The subsequent Revenue Bill 1999 which includes the insurance proceeds exemption has to go through a lengthy legislative process. It was until 8 July 1999 that the Bill passed three readings in the Council and came to enforcement.

At the same meeting, the Council passed the Merchant Shipping (Local Vessels) Bill which extends the requirement of compulsory third party risk insurance to all local vessels permitted to operate in Hong Kong waters. At present the requirement is applicable only to local ferries, launches and pleasure vessels. The minimum insurance cover for third party risks for passenger vessels and non-passenger vessels is proposed to be $10 million and $5 million respectively. The insurance sector has expressed reservation about an unlimited insurance cover given that most insurance companies do not have operational experience in third party risks insurance in respect of local vessels. Hence such a minimum amount will be set in the subsequent regulation in the light of insurers’ concern.

The Government has clarified that the legislation covers Mainland vessels with entry permits issued by the Marine Department. Those vessels are required to purchase insurance policies from authorized Mainland insurers. The Marine Department has the right to restrict entry of unauthorized Mainland vessels.

At the last meeting of this legislative session on 14 July 1999, the Council also passed the Insurance Companies (Amendment) Bill 1999 which provides the regulatory frameworks governing the operation of Lloyd’s. Lloyd’s is not a conventional insurance company but rather a market place for corporate or individual members underwriting business for their own behalf. Due to this unique mode of operation, many countries, like Hong Kong, have made special provisions to enable Lloyd’s underwriters to transact insurance business. The Bill was endorsed by the Council without debate.

The Hon. Bernard Chan

Institute News

The Examination Committee is currently processing the results of the above examination and will hold the Board of Examiners’ meeting shortly.

We have received some comments from the examination markers on candidates’ answers and we would like to quote some of them here. These will be very useful to those who shall write the future examinations.

Candidates should give more thought to what are required in the questions before they attempt them. Otherwise, time will be wasted and effort will be channeled in the wrong direction.

Examination markers also reminded candidates to answer questions in essay form, and point form is acceptable when used to illustrate arguments/comparisons.

Most of the questions were well answered. There were some points that future candidates should note:

• The distinction between agents/brokers, reinsurance/co-insurance.
• If the question asks one to differentiate, it is important that this is done after the basic characteristics are described.

For the question on contribution (Question 5b), most candidates associated ‘Contribution’ with the ratable proportion condition rather than an indemnifying insurer’s right to contribution as what it was meant in the question. In the same question, some candidates mistook ‘co-insurance (with the insured)’ as the ‘co-insurance’ where an insured has arranged separate primary contracts with a number of (co-) insurers on the same risk.

The least attempted question was Question 7, which was on stock declaration. There were only three candidates attempted this question and they had little knowledge on the topic. The marker was of the view that had they studied the topic hard enough, they would have found it easy to score good marks in this question.

There were several topics that candidates did not answer very well and they included:

1. The constitutional order of Hong Kong, especially when conflicts occur after the return of Hong Kong to the Mainland.
2. The concepts of strict liability.
3. Rules for the interpretation of statutes.

***************************************************************************

Revision Classes will start on August 16 in the Financial Services Development Centre.

Interested members can contact the centre directly at 2836 1862.

***************************************************************************

 Although it may seem to be a long way in the future we would ask you to mark Thursday 4^th November 1999 on the date of the I.I.H.K. annual team bowling tournament.

More details will be sent nearer the date, but perhaps it is time to think about forming a team and preparing entry as we are always over-subscribed.

Mike Haynes – PR & Social