As part of a transition to a risk based capital framework, the Insurance (Amendment) Bill 2023 modifies the change of control provisions under the Insurance Ordinance (“IO”). Going forward, Insurance Authority (“IA”) approval will be required for changes in minority and majority shareholder controllers of authorized insurers either (i) incorporated in Hong Kong (“HK insurers”), or (ii) designated by the IA (“designated insurers”) as carrying on a majority of their insurance business in or from Hong Kong. Significantly, IA approval will be required on a minority shareholder controller already approved by the IA as a minority shareholder controller becoming a majority shareholder controller. If you’d like more information about change of control transactions for insurance companies in Hong Kong or Hong Kong insurance law, please contact one of our insurance lawyers.
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Unless exempted, insurance companies carrying on any class of insurance business in or from Hong Kong must be authorized under the Insurance Ordinance (“IO”). This is so whether or not the insurance company is incorporated in or outside Hong Kong. Historically, a change in control of any authorized insurer, other than a special purpose insurer (“SPI”), was subject to prior approval by the Insurance Authority (“IA”) as well as post change notification requirements. For this purpose, a change of control could relate to either changes in management or changes in shareholders.
As part of a legislative package to transition Hong Kong to a risk based capital (“RBC”) regime, the Hong Kong government amended the IO so that approval and notification requirements for changes in control now depend upon the insurer’s nexus to Hong Kong.
Other than SPIs (which are special purpose vehicles issuing investment linked securities), authorized insurers incorporated in Hong Kong (“HK insurers”) and authorized insurers (“designated insurers”) whom the IA considers as carrying on the majority of their insurance business in or from Hong Kong are now subject to more stringent approval requirements whereas authorized insurers falling outside these categories are subject to more relaxed approval requirements.
Management Controllers
Changes in Hong Kong Managing Director or Chief Executive
For all authorized insurers, changes in the individual who is the most senior leadership executive responsible for Hong Kong will be subject to prior approval from the IA:
- HK insurers and designated insurers which are not SPIs– IA approval will be required for a change in the individual who is the managing director or chief executive
- Authorized insurers incorporated outside of Hong Kong (“non-HK insurers”) which are neither designated insurers nor SPIs – IA approval will be required for a change in the individual who is the managing director or chief executive responsible for the conduct of the whole of the insurance business carried on within Hong Kong (but not any insurance business carried on by the insurer outside of Hong Kong)
- SPIs – IA approval will be required for a change in the administrator, meaning the individual responsible for the administration of the whole business of the SPI.
Changes in Directors
IA approval will be required before appointing an individual as a director of HK insurers and designated insurers (other than SPIs). IA approval is not required for the appointment of directors of authorized insurers who are neither HK insurers nor designated insurers. However, all authorized insurers, whether HK insurers, designated insurers or otherwise, must notify the IA of any change in directors.
Changes in Individuals Performing Key Control Functions
Similar to the requirements for changes in the managing director or chief executive, IA approval will be required for appointments of the individuals who are the most senior executive responsible for prescribed control functions (e.g. risk management, financial control, internal audit, actuarial, and intermediary management) in Hong Kong of an authorized insurer (other than an SPI or a captive insurer):
- HK insurers and designated insurers – IA approval will be required for appointments of individuals responsible for the performance of a control function for the insurer
- Non-HK insurers (other than designated insurers) – IA approval will be required for appointments of individuals responsible for the performance of a control function in respect of so much of the insurer’s insurance business as is carried on within Hong Kong
Shareholder Controllers
IA approval for changes in shareholder controllers will now only be required in respect of HK insurers and designated insurers who are not SPIs. Authorized insurers who are non-HK insurers and who are not designated insurers are no longer subject to prior approval requirements for changes in shareholder controllers but are subject to the requirement applicable to all authorized insurers to notify the IA of any change in shareholder controller.
The approval requirements are now split between minority shareholder controllers and majority shareholder controllers.
Minority Shareholder Controllers
A “minority shareholder controller” is a person who, alone or with an associate or through a nominee, is entitled to exercise, or control the exercise of, 15% or more but less than 50% of the voting power at a general meeting of the insurer.
IA approval is required for a person to become a minority shareholder controller unless the person was a majority shareholder controller immediately prior to becoming a minority shareholder controller.
Majority Shareholder Controllers
A ”majority shareholder controller” is a person who, alone or with an associate or through a nominee, is entitled to exercise, or control the exercise of, 50% or more of the voting power at a general meeting of the insurer.
IA approval is required for a person to become a majority shareholder controller even if the person was a minority shareholder controller immediately prior to becoming a minority shareholder controller.
Fitness and Properness of Shareholder Controllers
As a general principle, the intensity of IA review of a proposed shareholder controller will depend upon the proposed controller’s level of influence over the authorized insurer.
Under the Guideline on Fit and Proper Criteria in relation to Authorized Insurers under the Insurance Ordinance (GL4), the IA expects a shareholder controller to have the knowledge and experience, competence, soundness of judgment and diligence required to hold an authorized insurer.
For a majority shareholder controller (and, if appropriate, a minority shareholder controller), the IA will expect clear and detailed strategic objectives and business plans conducive to the long-term stability and development of the authorized insurer. To this end, the IA will expect a long-term commitment and financial capacity to maintain the financial soundness of the insurer including by contributing additional capital as and when required to support the insurer’s operations. For this purpose, the IA may require letters of undertaking and due diligence reports prepared by independent professionals to speak to the proposed controller’s financial capacity.