• The Third Annual Conference of the Asia-Pacific Risk and Insurance Association (19 – 21 July, 1999)
• President Message
• Legislative Highlights
• Demystifying the "Alternative" in ART
• Legal Corner
• The Australian Insurance Institute
• Institute News

The Third Annual Conference of the Asia-Pacific Risk and Insurance Association (19 - 21 July, 1999)

President’s Message

Another three months has gone by since I last reported to you. A lot of things have been happening since then that I would like to brief you on.

As reported to you during out last issue of the Newsletter, your Institute, together with Lingnan University (ex Lingnan College), co-hosted the 3^rd Annual Conference of Asia-Pacific Risk & Insurance Association at Royal Plaza and Lingnan University on 18-21 July 1999. It was the first time that Hong Kong had the privilege of playing host to the APRIA Conference and the very first time your Institute had the opportunity of co-hosting any kind of conference. Through the hard work and the valuable time that the Organizing Committee put in, the Conference proved to be another success as we drew some 130 participants from over 10 countries. The Conference provided an important forum for scholars and industry practitioners to consider future trends, issues and solutions and to examine the role and direction of insurance education.

At the end of day, I am pleased to report that we were able to make ends meet in this event. On this note, I would like to extend my heartfelt thanks to all sponsors, Aetna International, Allianz Insurance, Chubb, Cigna, General & Cologne Re, Singapore College of Insurance and Swiss Re. Also, our sincere thanks and appreciation to the two keynote speakers in the opening ceremonies, the Honorable, Mr Bernard Chan and Insurance Commissioner, Mr Alan Wong, for their speeches and moral support.

Together with our Education & Examination Sub-Committee, Ms. Irene Wong and Mr Graham Norris, Mr Barry Yeung of our Seminar Sub-Committee, Mr Leo Ma, our IPP, we were invited to have a meeting with Financial Services Bureau on 30^th June 1999 discussing on human resources development in the financial services sector as the Government is aiming at improving the long-term competitiveness of Hong Kong as an international financial centre.

In today’s world-wide trends of deregulation and consolidation the insurance industry – just like any other financial services sector - is required to learn to cope with the changes or we will lose out in the fierce competition. As reported in the recent issue of the CII Journal, the insurance industry is already falling behind banks and other competitors. E-Commerce – the sale of goods over the Internet - is proving to be a challenge to the insurance industry. One-stop service has become a global trend. We, the insurance practitioners, have to sharpen our tools, to re-adjust our position in the financial services sector, to revamp our structure to see if we are flexible enough to join forces or to compete with other financial institutions. This, I believe, can only be achieved by constantly improving our knowledge through training and education. Your Institute is aiming towards that direction.

Peter Leung
President

For the second time I write for this column, I would like to say something about the Chief Executive’s annual Policy Address. What is the Policy Address? As some of my friends would ask. It is an outline of the government’s policy blueprint for the coming legislative year. The Chief Executive, as what the colonial governors did, comes down to the Legislative Council Chamber to give his policy speech before all legislators and senior government officials in October every year.

The SAR’s first legislature, after an almost three-month summer break, will resume its operation on 6 October with Chief Executive Tung Chee-hwa delivering his third policy address. For your understanding, I should say the Policy Address, comparable in nature to the State of Union Address given by the US President, sets the directions for some major developments lasting for a few years to over a decade, for instance the multi-billion dollar Cyberport project announced last year. Right on the next day, the CE takes questions from the floor of 60 lawmakers regarding the policy areas of their concern. During the question and answer session, each lawmaker is allowed to raise one question plus one follow-up question if he or she is not satisfied with the CE’s reply.

This is one of the several occasions in a year that the CE comes down to the Legco to interact with lawmakers on government policies.

Legislators as usual kick off a debate lasting two days a week after the policy speech. Members of different political affiliations would grasp the opportunity to vigorously pitch their policy wishes, or to fire stern criticisms against the government’s rationale for certain policies. It is also an occasion for critics to express dissatisfaction or regret over the administration’s performance. All the bureau heads or policy secretaries will hear the debates at the Chamber and respond to the questions asked a week later. All this will have occurred before they start implementing the new proposals covering their own policy areas outlined in the Policy Address. I consider this one of the most effective channels for officials and lawmakers to exchange views over a wide range of issues, although some criticisms officials faced could be quite acrimonious sometimes.

The House Committee chairman will then move a motion of thanks to the CE’s Policy Address, and the members will vote for or against it. It did happen in the past that some legislators succeeded to amend the motion expressing “regret” instead.

The Hon. Bernard Chan
Legislative Councillor

Demystifying the “alternative” in ART

In the last year, alternative risk transfer (ART) markets and products have enjoyed a higher profile than ever before. However, confusion still reigns in some quarters as to the products themselves, how they are defined and the motivations of end-users. One basic reason is that some products – most notably risk securitisation and insurance derivatives – employ contracts and structures unfamiliar to those within the re/insurance universe.

Another source of confusion, however, is that, under the “alternative” umbrella, these products are lumped in with others, such as multi-year, multi-line insurance programmes, which more closely resemble “traditional” reinsurance techniques. The question then arises why products in the latter category (which may also include financial reinsurance or finite risk cover) may be considered “alternative” at all.

Changing corporate needs

One starting point is to consider some of the changing needs of corporate end-users, encouraging them to move away from commercial insurance towards alternative products.

Corporate buyers are finding traditional commercial insurance markets inefficient. Range of cover and pricing are often dependent on cycles and the current state of the insurance marketplace rather than the needs of buyers.

Corporations are increasingly demanding protection for “uninsurable” business risks that are hard to find cover for within the mainstream markets. While some of these risks – such as known but hard-to-quantify environmental liabilities – may be covered under traditional policies, in other cases alternatives will need to be sought – for example the environmental liability exposures in corporate acquisitions. These and other liability exposures pose uncertainty over a longer time frame than the traditional one-year insurance accounting period. These risks may be more amenable to cover provided by a risk financing technique, customised to the particular risk protection needs of a client.

In an age of managing for shareholder value, large corporations value balance sheet stability more than ever before. In this scenario, they want more control and flexibility over cash-flow management. The ability to finance losses on a regular basis, in partnership with an insurer, has become more appealing than the ultimate long-term uncertainty of a simple indemnity relationship, common in traditional insurance. In addition, insurance in its traditional form often poses a credit risk, since claims payments are not guaranteed, and important elements of cover term and limits may not fall in favour of the insured. Corporations, in conjunction with shareholders, however, increasingly want greater assurances that capital will be present for low frequency, high severity risks.

Many large companies today are well-capitalised. In addition, they are experienced in the business of self-insurance, retention of risk and pro-active risk management. As a result, the value of insurance as capital provision has decreased, while the need for other value-added risk management and financing services has increased.

MMPs are alternative in that :

They bundle several lines of insurance, such as liability, property and business interruption, together within the same insurance programme.

They provide cover on an aggregate basis and pay out if combined losses of all lines reach a certain level

They avoid the market tradition of renewing policies on an annual basis, therefore reducing frictional or administrative costs, and

They often fix the rate for a three or five year term, as well as offering flexibility in the insured-insurer relationship. Premium charges can be altered when the exposure of the insured increases or decreases, which would happen, say, in the case of making a new investment and putting new capital at risk.

The most tangible gain for buyers is in the area of administrative efficiency. MMPs enable corporations to move away from the bulk-buying of diverse insurance programmes, to a customised, specifically-designed solution. Annual renewals can often take up to a third of the corporate risk manager’s time, time better spent on proactive risk management. In addition, MMPs allow corporates to reduce the number of carriers and help to facilitate a closer relationship with a smaller group of insurers.

By bundling together various insurance lines, and applying a protfolio approach, buyers can apply a higher degree of risk diversification before insurance comes into the equation. This self-diversification may be a better foundation for establishing the deductible within the overall programme. In this way, MMPs enable a more sophisticated integration of risk retention and risk transfer, based on the particular risk profiles of clients.

One extra advantages of MMPs is that buyers can find themselves in a better negotiating position in the insurance marketplace, after purchasing cover. If businesses are able to assume more risk, and package up the remaining risks, then they can get the interest of the market in risks that on their own would be ‘uninsurable’. Such risks may include credit risk associated with political upheaval, or particular business risks such as late product arrival from a supplier.

Finite risk reinsurance covers are alternative to traditional reinsurance in that:

Policy premiums are invested for the benefit of both insured and insurer. The income generated on the investment is ploughed back to help pay for claims. If the loss experience is favourable, the insured is able to share in the underwriting profit of the insurer in the shape of the income earned at the end of the contract.

Programmes are multi-year deals. The longer term is necessary to ensure the financing benefits of the profit share.

Consistent with their name, finite risk contracts involve a limited risk transfer from policyholder to insurer.

Contracts include both underwriting and timing risk, the latter covering the possibility that traditional insurance cover may be temporarily unavailable.

The main objective of finite risk contracts is to smooth cash-flows, rather than simply provide capital in the event of a loss. The risk being covered is not usually loss itself, but timing and credit risk associated with lack of immediate capital. The prime motivation is financial stability.

Finite risk contracts share some important similarities with MMPs. For example, both recognise that business risks cannot be financed within the one-year accounting period. Insurance is perceived as a form of capital to meet on-going business protection needs, rather than a once-yearly capital source.

While some products in the ART category use the capital market as an alternative form of capacity, and employ structures not yet familiar to re/insurers, many others stay within the remit of the re/insurance marketplace. The “alternative” products that we have examined may be considered so because they alter the traditional relationship between policyholder and re/insurer. Buyers get the benefit of a financing relationship, rather than the uncertainty of a simple indemnity risk transfer relationship.

In this sense, alternative markets depart from the win-lose proposition often seen in traditional insurance. In the traditional scenario, each party hopes that the other will act in its best interest. Alternative risk financing, however, ensures that financial stability remains the prime consideration. Products such as MMPs and finite risk contracts may be more fruitfully viewed as alternative risk financing products than as alternative risk transfer products.

Wilde Sapte
Insurance Review
Sept 1999

Legal Corner

RECENT TREND OF DEVELOPMENTS IN THE PRACTICE DIRECTIONS FOR THE PERSONAL INJURIES LIST

This article explores recent developments in the Directions provided by the High Court for the conduct of personal injuries litigation. They have an important message for all litigants; be prepared and comply with time limits.

On 10 April 1996, His Honour T L Yang, the then Chief Justice, issued a comprehensive Practice Direction on the Personal Injuries List. With effect from 15 April 1996, apart from actions within the Admiralty jurisdiction, all actions where a claim is made for damages for death or personal injuries, including claims arising from medical negligence, were to be assigned to the Personal Injury List (“the PI List”). The Judge in charge of the PI List was to be known as the PI Judge.

The April 1996 Practice Direction set out what documents were required to be served with the Statement of Claim. It also stipulated that after the discovery process, any party to the action could apply by summons to a Master for a hearing for further directions known as the Checklist hearing. In exceptional circumstances, the parties could apply to a Master for an order that an expedited hearing procedure apply to the action instead.

In most of the cases, there was to be a pre-trial review hearing before the matter proceeded to trial. During the pre-trial review hearing, the PI Judge made all orders necessary to resolve all outstanding interlocutory matters and to ensure that the action be tried speedily and efficiently. All parties had to be in a position to provide the PI Judge with available dates for counsel and witnesses for the purpose of fixing a trial date.

There were also directions in relation to Mention Hearings where no Checklist hearing had been fixed. Apart from this, provisions were made enabling the PI Judge or Master to make such orders as may be necessary for the conduct of the case at the hearing of the matter listed before him.

A more recent Practice Direction on the personal injuries list was issued by His Honour Andrew Li, the present Chief Justice on 24 July 1998. This Practice Direction mainly deals with the Checklist review and replaces the April 1996 Direction in this particular aspect.

With effect from 1 September 1998, the Plaintiff’s solicitors were required to lodge a Checklist review notice at the same time as the Writ was filed at the Registry. A date for the Checklist review hearing was given on the date of the filing and issue of the Writ, not less than 6 months and no more than 7 months from that date. The parties are required to file documents such as witness statements and expert reports at the Registry not later than 7 clear days prior to the Checklist review.

After the implementation of the July 1998 Practice Direction, Mr Justice Seagroatt issued notes and guidance to facilitate compliance with the Direction.

In December 1998, Mr Justice Seagroatt issued a Note For Practitioners. It clarified the procedure for the parties to file and exchange witness statements and spelt out that one of the purposes of the new Practice Direction was to avoid unnecessary interlocutory applications.

In September 1999, Mr Justice Seagroatt issued a comprehensive guidance known as Judge’s Revised Guidance Note for Practitioners on the Practice Direction. A more important part of the Guidance deals with the ambit of Court orders and Directions. It is stated that where the defence filed does not in fact disclose a defence and it is clear that as a matter of law and fact the Plaintiff must succeed wholly, judgment will be entered for the Plaintiff. Mr Justice Seagroatt also believes that very few cases justify a pre-trial review which too often in the past has been a mopping up exercise, compensating for the parties failure to comply with the Checklist orders. In addition, Mr Justice Seagroatt is of the view that interim payments are not sought as often as they should be.

Another feature of the Guidance is that a letter before action is attached as an encouragement to Plaintiff’s solicitors to notify Defendants in an intelligible and helpful form of the salient features relating to the claim. It is stated that its form may well, in the not too distant future, become part of a practice direction.

What can be seen from the development of the Practice Directions and Guidance notes is a willingness on the part of the Court to facilitate trials/or resolutions of personal injury claims at the earliest possible time. As a means of achieving this the Court will punish through the use of costs orders (amongst other orders) parties who do not comply (be they the Plaintiff, Defendant or their representatives) with Directions and time limits.

Mr Peter Cashin
Cameron McKenna

The Australian Insurance Institute

The AII - Some background information.

The Australian Insurance Institute (AII) is the peak body representing the education, training and professional development interests of the insurance industry in Australia.

In 1998, the AII had 10,892 individual members. In addition, 3,619 student members completed examinations with the AII in 1998.

Many of our students reside in Hong Kong. As well as direct enrolments with the AII, arrangements are in place for the accreditation of courses provided by several overseas institutes and educational organisations.

In existence since 1919, the Australian Insurance Institute has a long and proud history of providing service to the insurance industry.

However, the massive change that has taken place in the global insurance industry, (and indeed the financial services sectors of most countries), has greatly affected the attitude and approach of the AII in its business practice. In short, the Institute has undergone (and continues to undergo) major change in response to those industry changes.

Since late 1997, the Australian Insurance Institute has embarked upon a process of review, investigation and analysis of the changes and their impact upon our business. Our goal has been to ensure that the Institute responds accurately and appropriately to the needs of the insurance industry and all of our members.

Most of the insurance institutes around the world have faced very similar challenges in recent years. We have had to face declining numbers of members and students. We have had to deal with new business practices and learning priorities in insurance companies.

There is no doubt that for many of our members, students and associates these are difficult times. The convergence of the financial services sector, the merger and acquisition of major global insurance companies and the technological advances of recent years each go to undermine confidence in job security and long-term employment prospects.

Downsizing and cost cutting are continuing business imperatives in the insurance industry and few people dare to predict the future with any real certainty.

CEOs of companies have cited the top six key issues challenging companies in the next few years as being:-

Globalisation

Leadership

Radical change

Innovation

Culture

Customer relations

To that list, I would like to add ,

Fewer people in organisations must be able to do more and a highly multi-skilled workforce is essential if companies are to be successful in the next millennium.

In this environment, the recognition of human capital as our greatest asset is essential and the development of our people must be a top priority for companies.

I believe that the focus for everyone will be to concentrate on getting performance from our staff and deploying knowledgeable people at all levels of our business.

People are the key to business success. Knowledge workers provide companies with their only sustainable long-term competitive advantage.

We must be able to develop people who are capable of powerful insights and the ability to make correct, timely and courageous decisions and who have the capability to deliver them.

Education and training, and more education and training are key ways to achieve the development of a team of knowledge workers. This must be on a continuous basis.

The concept of continuous learning fits with employees needs and wants. In a recent survey the top three motivators of staff were

Job meaningfulness

Accommodating personal needs

Job training and education opportunities

Financial rewards came fourth in the list.

The Institute believes that it has an important role to play in education and training for the insurance industry in the next few years. Our objective is to help create an environment in our industry which will develop and motivate our people and will encourage them to achieve and grow.

I can foreshadow some significant changes to the structure of our education products in 2000. We are developing a new Learning Framework that will respond to evolving industry needs and embrace all the different types of knowledge worker. Some of my staff will go to Hong Kong to explain the changes to our students and members there later this year or in early 2000.

The Institute sees its core competency to be in training and development in the technical and professional areas. We also place a high focus on continuing professional development for current practitioners. It is here that we are concentrating our efforts.

We are working with companies and employees to ensure that their training and development programs produce quality, flexibility and responsiveness in a business context. We live in exciting times!

JOAN FITZPATRICK
Chief Executive Officer

Institute News

The IIHK annual bowling tournament was held on 4^th November at the AMF Bowling Centre in Ngau Tau Kok.

The evening was a great success with 18 teams competing and many other supporters attending.

We were grateful to Allianz Insurance (Hong Kong) for sponsoring the excellent array of trophies and for Mr Graham Norris who awarded them to the winners.

Mr Peter Leung, President of the IIHK presented the HSBC Champions Trophy to the outright winners.

For the record books the final result was : -

Champions : HSBC (team 1) Total score : 2,112

1^st Runner-Up : Ming An Total score : 1,846

2^nd Runner-Up : AXA Total score : 1,683

Best Series – Men Nelson Chow of HSBC – 595 pins

Best Series – Ladies Carol Yuen of Munich Re – 375 pins

This result means HSBC (team 1) retain the Champions Trophy and under the rules if they win next year they are allowed to keep the cup!

Michael Haynes
Social & P.R. – Chairman