• President's Message
• "Government Regulation or Self-Regulation – recent events at the ICCB."
• Legislative Highlights
• An examination of the "Avoidance of Certain Terms and Right of Recovery"
• Insurance Institute of India
• Recognition of Success!
• Institute News
• Examiner's comments on the last examination
• IIHK Annual Dinner on 21st March 2000

President's Message

A speech by the Chairman of the I.C.C.B. to the Insurers Club on 30/1/00 entitled: "Government Regulation or Self-Regulation – recent events at the ICCB."

"I am going to speak on a subject that most of us in this room know quite a lot about.

For those of you who don't know so much, because you may feel that the subject doesn't concern you, think again.

If we make a mess of our handling of the future of the ICCB, we will all of us be able to contemplate our failure for years to come.

There is only one issue that is worthy of our consideration –

Do you want to be regulated by the Government and monitored by consumer activists in the conduct of your business?

The answer to this question would benefit from wisdom and vision.

Your public, the Financial Services Bureau, the Insurance Commissioner's Office and the Consumer Council are all waiting to see whether we can clean up our act, and quickly refloat the good ship ICCB.

The ICCB Affair has attracted a degree of attention, some may say notoriety, because an insurer called for a Judicial Review of the way a ten-year-old complaints' resolution body conducts its business, and in so doing raised a few interesting issues.

Those issues included –

1. The Big Company vs the Little Company syndrome, the contention being that all the official insurance industry bodies are run by the Big Companies, and their thinking is occasionally perceived as self-serving, rather than balanced and visionary.
2. The debate as to whether it is in the interests of our industry to opt for self-regulation, or have the Government do the job for us. I sense that some people may feel that the Government will be more lenient than we are on ourselves.

That may be, but it has not been the case in other jurisdictions, in fact here in Hong Kong, you need only to look as far as the way in which the MIB is run by the Industry at virtually no cost or drama, and the ECAS, which features both, to get a hint of the difference you can expect.

Remember also that the ICCB adjudication process usually saves Insurers the unknown outcome and costs of the Courts, and that members of ICCB are at liberty to mention in their promotional material that they are giving their customers added consumer protection.

At a recent meeting of about 80 ICCB Members, it was shown that the Bureau has averaged about 130 complaints a year over the last decade.

Less than a dozen complaints a year ever get to the Board itself for a decision, since they are usually settled amicably by Members. The average amount of loss decided by the Board is $20,000, and in 1999 only 12 out of 243 cases dealt with by the Board were ruled in favour of the Complainant.

It follows that we are all risking Government intervention in our business that goes way beyond the powers of the ICCB, for for an amount which costs the entire industry $250,000 per year.

3. The fact that all this legal wrangling within the insurance "family" was anathema to some, ill-advised by others, and expensive by everyone.
4. It demonstrated that the workings of the ICCB, details of which have been included in a great many Annual Reports, AGMs and presentations, were not well understood, and comments were made that whilst emotionally satisfying, lacked basic homework.
5. The fact that the ICCB has in the past won praise from the very top of Government and from overseas during its nine year history, apparently counts for nothing once the chips were down - proof positive that it takes years to build confidence and trust, and no time at all to destroy it.

In 1986, the Law Reform Commission recommended that laws be promulgated to undo some of the seemingly unfair powers that insurers had when they produced insurance documentation and contracts that were first said to confuse the public due to their complexity, and then were seemingly used to escape liability due to technical breaches.

That fear remains, and probably always will do, no matter how hard we try. If the Government of the day had heeded the recommendations of that Commission, we would today have laws to tell us what to do, much as they have in the UK, the States and Australia. These laws are drafted in such a way as to permit constant tightening in order to please the public. They have teeth that bite, and are irreversible once implemented.

When Regulators take hold, and they have fixed up their own Complaints Handling Unit, they will, if we are prepared to learn anything from overseas' markets, move onto other vexed areas of public concern like disclosure of commissions, the banning of certain policy wordings,lots more reporting, and the establishment of Compliance Officers within all Insurance Companies.

I ask you – who would be hurt the most by such events?

The Big Companies who can afford it, or the Little ones, whose cost base is far more fragile?

Is the Board is above the law?

No, any more than the Government is on a normal day, but it can make it have the same effect if a member agrees to sign a contract to say that it agrees to accept the Board's decision, irrespective of the rights or wrongs of that decision, when it comes to a point of law.

Why would an insurer do that?

When Judge Hartmann delivered his verdict, finding for the insurer, it came as a huge shock.

However, his rationale was good.

The original Memorandum and Articles of Association dating from 1990, did not provide the powers to go behind the policy wording, and in fact there never will be any guarantees to stop a Member taking us to Court in future.

After all, when you think about, anyone is at liberty to take anyone to court.

He went on to say, however, that it would not take too many alterations to the ICCB's M&A to considerably improve the situation, and to reduce the chances of a successful suit in future.

The bottom line – the power of the ICCB exists only because we give it that power in our M&A, and then confirm our goodwill by not suing our own Club.

I can foresee that provided we, as Members of the ICCB, can –

1. Have the foresight to keep the ICCB afloat as the legitimate body to handle the future of complaint resolution.
2. Can agree to an amended process whereby three Honorary Secretaries, are permitted to do their work in such a way as to be fair and transparent.
3. Can accept the fact that once the Board has made a decision, whether it is right or wrong, or whether we like it or not, we must all accept it with good grace.
4. Can agree to alter our M&A to spell out the powers of the Board.
5. To agree, as gentlemen, that we will not sue our own Club, then I feel that we can quickly re-establish confidence with our publc, the Consumer Council and the Government. I ask that you support me in achieving this, so that I can tell the Press as soon as possible that we have succeeded in putting our house in order.

There is one thing that remains outstanding, and that is to pay our way out of the Legal Fees that have been incurred by both ourselves and the Member, a sum that totals about $1m.

If we all agree to pay, it will cost us less than $7,000 per Company.

However, I would plead that this is not the time for small-mindedness leading to a refusal to pay, no matter what your personal reasons may be.

This is one time where we must be seen to be sticking together as an industry.

I would suggest that this a time when there needs to be an acceptance that we are all human and make mistakes, but it is our ability to learn from our mistakes that sets us apart as members of the human race.

Thankyou"

It is my pleasure to update you some latest developments of the compulsory third party risks insurance for local vessels. With the passage of the Merchant Shipping (Local Vessels) Bill in the Legislative Council last year, statutory insurance will begin to cover all local vessels.

The Marine Department is now in the process of drafting relevant subsidiary legislation for full implementation of the Ordinance. Details for the implementation of compulsory third party risks insurance to all local vessels will be announced later when the government tables the relevant subsidiary legislation to the Council for vetting.

At present, only pleasure vessels, launches and ferries are bound by statutory requirement of insurance for third party risks. The amount required for pleasure vessels is $600,000 and for ferries is $3 million.

In view of rapid increase in marine traffic which may bring about higher risk of accidents involving both locally licensed vessels and river-trade vessels, the government proposed to extend this compulsory third party risks insurance requirement to all local vessels permitted to operate in Hong Kong waters.

The new statutory framework is to regulate and control local vessels by putting previous legislation scattered among different Ordinances under a comprehensive body of legislation solely for local vessels, which is to ensure proper protection to passengers and operators sustaining injuries in marine accidents.

Under the new framework, statutory insurance for third party risks of local vessels will be raised to $5 million for vessels containing fewer than 12 people and $10 million for vessels containing more than 12 people.

In 1996, the Accident Insurance Association of the Hong Kong Federation of Insurers introduced a new standard motor vehicle insurance policy. Among other things, the "Avoidance of Certain Terms and Right of Recovery" clause was amended to read as follows:-

"If the Company is obliged by the laws of any country within the Geographical Area or by virtue of any agreement between the Company and The Motor Insurers' Bureau of Hong Kong to pay an amount for which the Company would not otherwise be liable under this Policy the Insured and any other person on whose account the payment is made shall forthwith repay such amount to the Company". (words in italics are newly introduced)

This amended clause is different from a similar clause in old policies in two respects:-

1. It rectifies a mistaken reference to the "agreement between Government and the Motor Insurers' Bureau of Hong Kong" (presumably and mainly "the First Fund Agreement" dated 1st February 1981 or the "MIB Agreement" as it is more commonly known) by substituting it with a reference to the "agreement between the Company and The Motor Insurers' Bureau of Hong Kong". That is what is commonly known as the "Domestic Agreement" dated 1st February 1981. The old reference to the First Fund Agreement was wrong because an insurer is only required to make payment under the Domestic Agreement and not under the First Fund Agreement.

2. It also extends the class of persons from whom recovery can be made from "the Insured" in the old clause to "the Insured and any other person on whose account the payment is made".

With the new recovery clause directing at the Domestic Agreement, a situation may arise causing possible injustice to an insured person. The amended clause gives a right to an insurer who is obliged to pay damages under the Domestic Agreement to recover the same from "the insured and any other person on whose account the payment is made".

Let us take as an example the situation where an insured vehicle had been stolen from the owner. While the stolen vehicle was being driven by the car thief, it hit and injured a pedestrian. Under the "Insurer Concerned" principle of the Domestic Agreement, the insurer who at that time was providing insurance against bodily injury liability in respect of the vehicle has to satisfy any judgment obtained against the car thief because under such principle the insurer remained liable notwithstanding that the car thief was in unauthorised possession of the vehicle.

It is not entirely clear whether the words "on whose account the payment is made" qualify the words "the insured" as well as the words "any other person". However, if one applies the contra proferentum rule of construction which is invariably applied to construe standard form contracts including insurance policies, this should be the case. Otherwise, it will result in a grave injustice in that an insured will be made liable to reimburse an insurer of any payment which the insurer made in satisfaction of a judgment against a car thief. The unfairness is aggravated by the fact that the insured has already paid a levy to the MIB representing 3% of the premium.

It is submitted that steps should be taken to clarify with the draftsman of the clause to find out what he had in mind. Did he mean to say the following?

"If the Company is obliged by the laws of any country within the Geographical Area or by virtue of any agreement between the Company and the Motor Insurers' Bureau of Hong Kong to pay on account of the insured an amount for which the Company would not otherwise be liable under this policy the Insured shall forthwith repay such amount to the Company."

Finally, it also seems that the reference to the recovery against "any other person on whose account the payment is made" is rather pointless. An insurer cannot rely on a contract between it and the insured (i.e. the policy) as a basis to claim against other parties who have no privity to the contract. The right of recovery against third parties may be provided for by amending the Domestic Agreement to give to the "Insurer Concerned" a right to request the MIB to nominate the Insurer Concerned as the party to whom any judgment obtained by the injured person is to be assigned under clause 8(e) of the First Fund Agreement. For completeness, such clause is set out hereunder:-

"8. Conditions Precedent

M.I.B. shall not incur any liability under Clause 2 of this Agreement unless or until the following conditions are met:-

...

(e) the judgment or judgments ... shall be assigned to M.I.B. or its nominees (my emphasis), and the plaintiff as judgment creditor will lend his name and do everything necessary or conducive to the recovery of the judgment debt from the debtor;"

To preserve such right of recovery against the third party, it is advisable for the "Insurer Concerned" to pay the claim through the MIB and not directly to the injured person. Otherwise, it may arguably not be able to invoke clause 8(e).

Insurance Institute of India

The competition allows essays, articles, research papers and other original contributions which would be of value to the Insurance Industry. The deadline for submission is 31^st March 2000.

If any IIHK member has interest in submitting material please contact Carol Yuen on fax 28698655 for further details. Thereafter all contact must be directly between the member and the Indian Institute in Mumbai.

Recognition of Success!

As mentioned in the “President’s Message” the IIHK has delighted to be able to issue the following press release recently. This provides solid support for the Diploma course.

“The Hong Kong Government’s Insurance Authority has recognised the value of the Diploma in Insurance Studies, organised and administered by the Insurance Institute of Hong Kong, by giving full exemption for Diploma holders from their new Insurance Intermediaries Quality Assurance Scheme.

This valuable privilege allows the I.I.H.K. diploma holders to trade as fully recognised competent professionals in the industry in Hong Kong.

The exemption is a vote of confidence by the Government in locally run training, educating and examining boards and will encourage further work in Hong Kong to ensure its young professionals remain in the forefront of the service sector.

For further information on this topic please contact Michael Haynes at mhaynes@hermes.com.hk”

Institute News

Examination candidates who participated in the last examinations will have received their results by the time they read this. Here are the statistics for the examination:

Twelve candidates have completed their Diploma in this Series. Our whole-hearted congratulations to all of them! They are:

Examiner's comments on the last examination

If you are continuing with your studies and want to improve yourself in your future examinations, the following comments made by the markers in the last examination will offer some help to you.

1. If the question asks for suggestions, the examiner is expecting suggestions that are not just theoretically correct but also practically possible. An example cited by the marker was in a question where the insurer had a problem in placing a risk with an exceptionally huge sum insured in the available treaties. The suggestion to arrange a new second surplus treaty immediately was not practical and was impossible. The suggestion had not considered the time needed to arrange a treaty and also the practicality of arranging a treaty for one exceptional case.
2. In questions where terms were to be defined, it was reported that many candidates attempted questions by repeating the term itself without adding the necessary explanations e.g. in explaining IBNR, the answer given was 'losses which have been incurred but not reported …'. More elaborated answers on what the term meant, when it was set and how it was calculated would definitely be much more enlightening.
3. Candidates in general were weak in answering essay type questions. They should practise more in their answering skills. Preferably the answer should begin with a sentence that immediately answers the question, then followed by a detailed explanation of the first sentence. Some candidates failed in gaining high marks because of the fact that they did not make themselves clear and tend to stray. Others failed because they simply stopped short of the examiner's expectation by giving a one-line answer. Always take note of the marks given for a question or section of a question. If the mark is 50% of the total marks for the question, it is bound to require something more than a one-line remark.
4. All questions in this examination cover local insurance practices unless otherwise stated. Therefore, wherever it is relevant and available, candidates are expected to support their answers by quoting local legislation. Some markers reported that candidates very often quoted UK or American laws.
5. Candidates are also reminded that answers should generally be in essay form; point form is acceptable, e.g., where this is used to illustrate side-by-side comparisons or note form is specifically requested in the question.
6. There was one particular observation on candidates' answers in the Insurances of the Person paper and that was many candidates had mixed up the sources and functions of the three terms: bonus/dividends found in participating policy and the cash value of a life policy.

This is a reminder to all examination candidates that the syllabuses for the four examination papers have been revised. If you are studying for the coming examinations, it is advisable that you should keep the circulars that we sent to all members on this topic in January.

Examination candidates can now mark their calendar. The next diet of examinations will be held on May 27 and June 3, both Saturdays. Registration for examination etc. will be announced through circulars in April, 2000.

New revision classes based on the revised syllabi held by the Financial Services Development Centre of the Vocational Training Council will start soon. The earliest class will start in the third week in February, shortly after the Chinese New Year. As the viability of the classes will depend on the enrollment number anyone who is interested in taking oral tuition should enroll immediately or contact the Centre at 2836 1862 for details as soon as possible.

IIHK Annual Dinner on 21st March 2000