Industrial Relations and Law in Hong Kong
Abstract
The self regulatory regime in Hong Kong consists of the self regulatory organizations and the insurance authority. The self regulatory regime has been effective for the last few decades. This is evidenced by the rapid growth in the insurance industry. The Hong Kong insurance industry has grown rapidly and led to more investments. The self regulator system has been flexible and this has made it easy for the system to adjust to the changes in international market. The self regulatory framework helped Hong Kong insurance industry survive the 2008 financial crisis. The self regulatory organizations have not been effective in monitoring the insurance intermediaries due to their weaknesses. First, the self regulatory organizations do not have enough power to carry out investigations and solve complaints. In addition, the self regulatory organizations are not able to ask for documents from insurance intermediaries and insurers or question them. Moreover, they are not allowed to inspect premises owned by the intermediaries and insurers. This has made the monitoring process in effective and lead to exploitation of consumers. The self regulatory organizations are flexible and this has enabled them to perform well. The need to protect consumer interest and improve the regulation of the insurance intermediaries and the entire industry has led to establishment of an independent insurance authority. The independent insurance authority will replace the current regulatory body. The independent insurance industry has various benefits. First, it will improve consumer confidence. It will also improve the handling of complaints and investigations. Additionally, the independent insurance organization will improve the monitoring of the insurance industry. The independent insurance authority is inline with the international standards. Though the independent insurance authority will help improve the regulation of the market it will have negative impact on the industry, brokers, agents and insurers. It will lead to financial difficulties as it will rely on financial help from the parties above. It will also lead to conflict of roles as it will perform roles performed by self regulatory organizations. The inclusion of the self regulatory organizations in the new regime might affect the regulation of the industry. The following changes should be made so as to avoid the problems above. First, the roles of the independent insurance authority and the self regulatory organizations should be defined and separated. Also, the government show how the insurance intermediaries will move to the new system. It should also abolish the self regulatory organizations to ensure the new regime is not self regulatory. Hence, the government should implement the independent insurance authority as it will enhance the insurance industry and eliminate issues in the industry.
Introduction
The regulatory regime in Hong Kong does not comply with the international practice. Hong Kong differs from other countries in that insurance intermediaries like agents and brokers in the country are subjected to a self regulatory system. The insurance intermediaries are registered with various organizations in the country. For example, the insurance intermediaries are registered with insurance agent’s registration board and the Hong Kong confederation of insurance brokers. In addition, the insurance intermediaries are registered with the professional insurance brokers association. Apart from being registered with the organizations listed above, the insurance intermediaries are supervised by the organizations. The self regulatory regime in the country has had a negative impact on the insurance intermediaries. First, the self regulatory system has affected the management of insurance brokers in the country. This is because the self regulatory organizations involved in the management of insurance intermediaries have conflict of interest. The differences between the various organizations have led to poor performance among the insurance intermediaries. In addition, the conflict of interest has made it hard to resolve complaints filed by insurance brokers and agents as the self regulatory organizations are funded by the firms. Moreover, studies have shown that the disciplinary procedures and the level of sanctions are not inline with international standards. Also, the handling of complaints in the self regulatory organizations is not fully aligned. Also, studies have shown that self regulatory organizations are not able to impose sanctions over the insurance brokers and agents. This is because the organizations do not have enough powers to make such decisions. The self regulatory organizations are not effective and this has forced the government to reform the regulatory regime of insurance brokers in the country. The government has planned to change the self regulatory regime by developing an independent insurance authority.
Discussion
Overview of the Hong Kong insurance market
Hong Kong remains one of the most important financial centers in the world. This is because of its geographical location and good legal system. Also, the regulatory framework in the insurance industry has made the country one of the leading insurance centers in Asia. It has also attracted a large number of the top insurers in the world. In June 2008, a total of 176 insurers were allowed to carry out insurance activities in the country. This is according to the office of commission of insurance.86% of the insurers were general insurers and 26% were life insurers. In addition, 11% of the insurers were composite insurers. 90 out 176 insurers were allowed to carry business in Hong Kong. The other insurers invested in other countries like United States and United Kingdom (Cheng, Hong Kong centre for economic research., &Hong Kong economic policy studies forum, 1998)[1]. Also, the report released by the office of the commission for insurance showed that 521 insurance brokers were authorized to carry out business. Also, 2277 insurance agencies participated in insurance activities. The number of general insurers in Hong Kong is more than the number of life insurers. Though the number of general insurers is more than that of life insurers, the gross premium produced by the life insurance is more than the gross premium produced by the general insurance. In 2007, the gross premium gotten from the general insurance was almost $197 billion. Also, the gross premium gotten from life insurance was $173. This is according to the office of commission for insurance. The regulatory framework that is used to regulate insurers and insurance intermediaries is found in the insurance company’s ordinance CAP41. The insurance authority is the main regulatory body in Hong Kong. The regulatory body is aimed at protecting the interest of policy holders in the country. It is also aimed at enhancing the stability of the insurance industry in the country. The office of commission of insurance is led by the commission of insurance and it was established by the insurance authority in 1990 to govern the insurance companies’ ordinance. The insurance authority has the right to authorize insurers to carry out bushiness in Hong Kong and outside the country. It is also responsible for regulating insurers by examining their financial statements and business records that are submitted by the insurers. Also, it regulates the insurance intermediaries to avoid exploitation of the consumers (Bangyan, Nyaw &Violet law, 2011)[2].
The insurance authority provides information to insurers and insurance intermediaries using circulars and other methods. The insurers and insurance intermediaries are guided about the standards and criteria that the organization will use in connecting with the regulations being used. The insurance authority has supervised the market regularly to encourage development. The insurance authority has developed various initiatives to prevent the insuring public from being exploited by the insurers (Organization for economic co-operation and development, 1999)[3]. The insurance industry in Hong Kong has developed policies that guide insurance companies in Hong Kong. No company is allowed to carry business in Hong Kong unless it is authorized to carry out business in the country as stated in section eight of the ICO. Only companies that meet the requirements stated are allowed to carry business in Hong Kong. The insurers should meet the requirements that are stated in section 8(2) and section 8(3) of the ICO. The companies should be able to comply with the minimum capital requirement so as to be able to operate in the country. They should also be able to meet the solvency margins and other regulations that are need to be able to operate in Hong Kong. The regulatory framework in Hong Kong has helped ensure there is a balance between the policyholder protection and commercial autonomy. The policies and principles governing insurance activities in the country encourage firms to be independent when carrying out business. The policies also protect the interest of the policy holders. This has led to growth of the industry. The recent financial crisis in the world affected many countries and this forced the countries to adopt better controls so as to prevent being affected in future (Great Britain.commonwealth office & Hong Kong government information services,1996)[4].
Current regulatory framework in Hong Kong
The management of the insurance industry in Hong Kong is not based on one regulatory body, but on many organizations. There are numerous self regulatory organizations in Hong Kong that are involved in the management of the insurance industry. The self regulatory organizations are involved in supervision of the insurance intermediaries and the handling of complaints in the organization. Self regulatory organizations are considered to be non governmental organizations that have common public policy objectives. For example, the organizations are aimed at improving the market integrity, efficiency and protecting the investors. In addition, Self regulatory organizations are supervised by a government regulator. Also, self regulatory organizations have different types of authority like a statutory authority and an authority that is given to them by the government. Also, the self regulatory organizations develop rules and regulations for the insurance intermediaries and insurers who are subject to their regulatory. Moreover, the self regulatory monitor how firms and insurance intermediaries comply with the rules and regulations that have been set. Moreover, self regulatory have industry representatives on their boards. The industry representatives play an important role in the management of the organizations and insurance industry. Also studies show that self regulatory organizations have structures, policies and procedures that are used to manage the interest between the commercial activities and regulatory activities. This ensures the interests are well managed. The characteristics above apply to all the self regulatory organizations regardless of the industry they are in (Cch Asia, 2003)[5].
There are different organizations that manage insurance brokers and insurers as stated above .First, the Hong Kong confederation of insurance brokers manages intermediaries and insurers.. The Hong Kong confederation of insurance brokers was founded 1993 after the Hong Kong insurance brokers association and the society of insurance brokers were merged. The Hong Kong insurance brokers association was established in 1979 and the society of insurance brokers was developed in 1980.The Hong Kong confederation of insurance brokers was established to monitor the insurance industry and ensure that it performs well. Apart from the Hong Kong confederation of insurance brokers, the Hong Kong federation of insurers was created in1988 to advance and enhance development of the insurance business in Hong Kong. The organization has been supported by the government for a long time. The Hong Kong federation of insurers helps boost the public confidence in the insurance industry and also improve the performance of the insurance industry in the country (Economic intelligence unit, 2005)[6]. Further, the professional insurance brokers association was established in 1985 by insurance brokers in the country. Before the establishment of the professional insurance brokers association, brokers in the country managed their own business. Most of the brokers found it hard to comply with the regulations set by the government. Some of the insurance brokers in the country organized for the establishment of a professional body to help them manage their business and resolve problems they encountered as insurance brokers. After gathering information from the insurance industry in the country, the insurance brokers developed the professional insurance brokers association (Organizational for economic co-operation development, 2001)[7].
Currently, the insurance industry in Hong Kong is managed by the office of the commission of insurance. The office of the commission of insurance is a government department that is led by the insurance authority. The main regulations in the insurance industry are included in the insurance companies’ ordinance. The insurance companies’ ordinance has offered an environment for the operation of the self regulatory regime. The self regulatory regime requires brokers at different levels to register with specific professional bodies that are approved by the insurance association. The insurance brokers are supposed to be supervised by the professional bodies that are approved by insurance association (PricehousewaterCoopersLLP, 2001)[8]. In relation to insurance brokers, there are two professional bodies that have been approved by Insurance association. That is the Hong Kong confederation of insurance brokers and the professional insurance brokers association. Any person who wants to be an insurance broker should be authorized by insurance association. If not authorized by the insurance association, the insurance broker should be admitted as a member by the confederation of insurance brokers and the professional insurance brokers association. The Confederation of insurance brokers and professional insurance brokers association are supposed to handle complaints against the insurance brokers. The organizations conduct investigation and take disciplinary action in specific cases. The insurance association does not supervise insurance brokers directly (Daryanani &Hong kong government information services, 1995)[9].
Weaknesses of the self regulatory organizations
Most people argue that the self regulatory regime has been effective in regulating the insurance industry because of its flexibility. The self regulatory regime is able to adapt to any market changes and hence ensure the insurance industry is performing well. In addition, the self regulatory regime is also able to repair the market problems encountered in the insurance market within the shortest time possible. Also, the self regulatory regime has been cost effective. Further, most people have supported the self regulatory regime because it encourages close relations between the senior management in the insurance bodies and the insurance brokers and agents. The senior managers and insurance intermediaries have worked together to solve issues in the insurance industry. The close relationship between the various parties has made it easy for the approved bodies and the insurance association to enforce the regulations governing the insurance industry easily. This is because the approved bodies and the insurance association do not face resistance from other parties like the insurance brokers and agents. Though the close relationship has helped enforce the regulations well, it has not helped eliminate problems in the insurance industry (Organization for economic co-operation and development, 2001)[10].
The self regulatory mechanism in Hong Kong has not been effective. There are various factors that have made the self regulatory regime ineffective. First, the self regulatory regime is not inline with the international standards. This has made it hard for the self regulatory regime to meet the needs of the insurance brokers and customers. The ineffectiveness of self regulatory regime has been evidenced in numerous cases. First, it was evidenced in a claim litigation case heard in 1999.The insurance claim ligation case heard by the high court showed that there was need to improve consumer protection in the industry. In addition, the claim litigation case showed the challenges that result from using a self regulatory mechanism in the insurance industry. A report published by the consumer council highlighted the incorporation of a universal clause in the “injury policies’. The clause required that external wounds to be harmful to the interests of the insured. Though the clause affected consumers in the industry negatively, the insurance industry argued that the clause helped eliminate false claims. The clause made it hard for the consumers to get quality services. The consumer council argued that the insurance industry should remove the clause so as to make provision of services effective and benefit all people in the industry. The claim litigation showed the ineffectiveness of the claim complaints bureau and the in effectiveness of the self regulatory mechanism used in the insurance industry (Asian development bank, 1999)[11].
Additionally, the self regulatory organizations have not been effective because they do not have enough powers to resolve complaints. The insurance authority has not given the self regulatory organizations power to handle cases. The self regulatory organizations have been given different responsibilities by the insurance association. For example, they have been given permission to supervise insurance brokers and also resolve various cases. Though the self regulatory organizations have been allocated various responsibilities, the self regulatory organizations have no adequate supervisory powers. Failure to have adequate supervisory powers has affected the organizations objectives as they are not able to supervise the insurance intermediaries well. In addition, the self regulatory organizations do not have powers to issue licenses and carry out routine supervisions in the industry. This has made it hard to indentify issues facing insurance brokers in the industry. Most of the insurance brokers in the country have opposed the self regulatory organizations because of the negative impact it has on them. The insurance brokers have found it hard to resolve their issues due to lack of assistance from the self regulatory organizations (Prasad &Chan-Lau, 2004)[12]. In addition to that, the self regulatory organizations have not been able to resolve complaints in the insurance industry because they are not able to start investigations and inquiries of intermediaries and insurers. The self regulatory organizations do not have the right to start investigations and question the insurance intermediaries and insurers. This has affected the investigation of complaints in the insurance industry. This is because the self regulatory organizations cannot get information from the insurance intermediaries and the insurers. The investigation process has also been affected by lack of enough information. The self regulatory organizations do not have the right to ask insurers and intermediaries to produce their records and documents. Generating records and documents that are linked to insurance activities in the organization helps evaluate the performance of the insurance intermediaries and insurers. For example, it helps determine if the insurance intermediaries are acting according to the policies set. It also helps prevent exploitation of the consumers. Most of the brokers and agents are not able to offer quality services as they are not supervised well. Instead, the brokers and agents take advantage of the consumers. Monitoring the business often helps eliminate unethical behaviors. It also helps indentify law breakers and punish them accordingly (Kwo-Honcheng, Hong Kong centre for economic research &Hong Kong economic policy studies, 1998)[13].
Lack of powers has also affected investigations and settling of complaints. This is because the self regulatory organizations are not able to ask information from the insurers and intermediaries. This in turn influences the investigation process and the monitoring of the insurance intermediaries. In order to ensure effective monitoring of the insurance brokers and agents, self regulatory organizations should have the power to ask for records and documents. This will ensure the services offered are effective and consumers get the right services at the right time. The self regulatory organizations do not have the powers to apply to the court to ask the insurance intermediaries and insurers to comply with the powers given and laws set. This has prevented them from imposing the right punishment and ensuring it is followed. Hence, the self regulatory organizations have found it hard to enforce the right conduct among the insurers and the insurance intermediaries. Thus, this has affected the control of the insurance industry. Promoting the right behavior among the insurance intermediaries helps improve performance of the industry and consumer confidence. Many countries have developed mechanisms to promote health behaviors among insurers and insurance intermediaries in the industry. For example, the countries have developed an independent body that monitors the industry and has the right to apply to court for help in enforcing the laws established. Countries that have established an independent body apart from the self regulation system have realized the benefits associated with unlike countries that have not. Although Hong Kong insurance industry is the best in Asia and other parts of the world, the country has not realized the advantages of an independent regulator and this has slowed development and investment in the country (Hong Kong financial services and treasury bureau, 2010)[14].
The self regulatory organizations have found it hard to monitor the insurance brokers and agents because they do not have the authority to inspect any businesses that are owned by different insurers and intermediaries. They do not have the right to enter businesses that are owned by the insurer and intermediaries. The restriction to enter different business and inspect has affected the monitoring process. This is because the self regulatory organizations are not able to monitor the insurance brokers and agents without maintaining a close relationship between the organizations and the insurers and intermediaries. Having a close relationship with different parties in the industry helps improve the monitoring of the brokers and agents. This enhances the behavior of the brokers, agents and insurers and improves the overall performance of the industry. The self regulatory organizations should have the right to inspect businesses under the new system. This will help improve the monitoring of the insurance intermediaries. The self regulatory organizations have not been able prosecute offences that have been committed by different people in the industry thoroughly. The self regulatory organizations do not have the power to prosecute the offenders. This has impacted results from different investigations and influenced the performance of the insurance industry. Most of insurance intermediaries and insurers who have broken the law go unpunished and continue to perform malicious activities (HO, Scott, Wong &Chan, 1991)[15].
Apart from supervising insurers in the industry, the self regulatory organization have not been able to carry out inspections in the industry and hence affected the performance of the insurance brokers and the overall performance of the industry. In addition to inspection, the self regulatory organizations are supposed to impose sanctions against those who breach policies and regulations. However, the self regulatory organizations have not been able to do so. This has made it hard to ensure justice and transparency in the insurance industry as most of the insurance brokers have not been able to get fair services. The self regulatory organizations have found it hard to solve cases that are connected to the insurance industry due to lack of adequate power. The insurance industry in Hong Kong is managed by the office of the commission of insurance. The office of the commission of insurance has no power to intervene in commercial cases among the insurers and insurance intermediaries. The organization has the power to monitor how the cases are carried out and ensure they are carried out according to the regulations governing the specific bodies approved. Though the office of the commission for insurance helps monitor the commercial cases and how they are resolved, the self regulatory organizations have not been effective in resolving most of the cases. The self regulatory organizations give power to insurers, but not the insurance intermediaries like the insurance brokers and agents. The unequal distribution of power in the organization has affected the interest of the brokers and agents as they are not able to get the right help. The new regulatory frame work will ensure the insurance intermediaries and the insurers have equal powers and hence ensure fairness (Tan, 2000)[16].
Another weakness of the self regulatory organizations is the competition between various organizations. The rate of competition between various self regulatory organizations has increased. Most of the self regulatory organizations in the country are funded by the members. The self regulatory organization is trade bodies that are financed by the members. This has led to conflict of interest in the industry especially among the insurance brokers. This is common where there are two broker self regulatory organizations. The conflict of interest has affected how the organizations offer their services to the insurance brokers and agents. Further, the competition for membership in the self regulatory organizations has led to poor perception towards disciplinary actions. Most people argue that the self regulatory organizations do not take the right disciplinary actions and this has affected the insurance intermediaries who file certain cases. Most of the complaints filed by insurance brokers and agents are handled by the insurer who is the main agents (Singh, Kong, International monetary fund, 2005)[17]. Further, studies carried out by various researchers on the self regulatory framework in Hong Kong showed that the self regulatory organizations in the country are not fully aligned in respect to the disciplinary procedures in the organization. Also, the studies showed that the self regulatory organizations are not aligned to the level of sanctions and mechanism used to handle complaints in the country. Failure to align the self regulatory organizations with the right areas has affected resolving complaints filed by various people in the insurance industry (Nanyang technological university & school of accountancy and business, 1997)[18]. The findings from the study showed that the self regulatory organizations have limited sanctions. The self regulatory organizations use different sanctions to punish members who have broken the law. The main sanctions used by the self regulatory organization are written reprimands and suspension. Also, the self regulatory organizations revoke the membership of their members if they do no comply with the policies and regulations established.
Moreover, the studies have shown that the self regulatory organizations are not inline with various practices used in other insurance industries in different countries. Most of the insurance industries in other countries have established an independent organization that regulates the intermediaries including brokers and agents. The regulatory organizations established are not involved in trade activities. This has made it easy to stabilize the insurance industries in the countries. The establishment of an independent organization in the countries has helped eliminate competition between the organizations and their members. This has in turn helped provide quality regulatory services. The self regulatory organizations in Hong Kong are not independent. This is because they are established under various organizations. For example, they are established under the insurance association and the office for the commission of insurance. The establishment of the self regulatory organizations under the organizations above has affected their effectiveness as they are not able to carry out independent activities. This has also affected the insurance intermediaries as the self regulatory organizations are not able to regulate and supervise them well. Hence, this has influenced the insurance industry negatively (Goo, Carver &Whitman, 2003)[19]. Further, the self regulatory organizations are not credible and transparent. This is evidenced by the report released by price house water coopers in 2007.The report showed that transparency and credibility was a major issue in the organizations and it affected the functioning of the organizations. Lack of transparency and credibility has affected the insurance industry. This has forced the insurance association to work closely to improve transparency and credibility in the organizations. Also, the insurance association has also worked with the self regulatory organizations to improve the self regulatory regime. The self regulatory organizations are working hard to increase the number of independent members on their boards and improve revealing of information on complaints and disciplinary actions that are taken by the organizations. The CIB and PIBA are also working hard to align their disciplinary procedures so as to improve consistency in the sanctions that are imposed on insurance brokers (Pricewaterhouse, 1992)[20].
Also, the self regulatory organizations do not educate the insurance intermediaries, policy holders and other parties. This has made it difficulty for the self regulatory organizations to maintain existing customers and attract other customers. Also, the organizations do not conduct studies on latest development in the industry. Additionally, they do not carry out study on the regulatory issues in the insurance industries. For example, they do not conduct studies to determine problems that are linked with particular insurance products. Also, they do not carry out research to determine issues that are raised by policyholders. Failure to carry out research in the industries has made it hard to enhance health growth in the insurance industry. This is because the organizations are not able to indentify areas that need to be changed and issues that need to be resolved (American chamber of commerce in Hong Kong, 1991)[21]. Countries that have encouraged regular monitoring of the insurance industry and education of the policy holders and intermediaries have performed well. This is because they have been able to indentify various issues that affect the consumers, insurance intermediaries and other parties in the industry. The insurance industries in the countries have become more stable and developed (Carver, 2001)[22]. Also, countries that have had independent regulators have recorded good performance. For example, UK and Singapore have performed well as they have independent regulators. The Office of commission of insurance is the only financial regulator in Hong Kong. The regulator is influenced by the government. The OCI in Hong Kong is not aligned with international insurance supervisory laws that are stated by the international association of insurance supervision. The principles require all regulators to be independent. For example, the regulators should have political independence, financial and political independence (Yu, Hong Kong centre for economic research &Hong kong olcy studies forum, 1997)[23].
The self regulatory organizations have not been able to perform well because of the structure of the insurance authority and the structure of the organization. The insurance authority does not have the right structure and policies and this has affected the performance of the self regulatory organizations. The self regulatory organizations are guided by the insurance authority in their activities. The structure of the independent insurance authority is made up of the “general business division” and “policy and development section”. Another section is the “long term business section”. On the other hand, the independent insurance authority will have five sections. The insurance authority has not been able to perform its roles well. For instance, it has not been able to monitor the insurance market well due to lack of information as it does not have enough workers to gather information. The insurance authority has more 123 employees. Failure to have enough employees in the organization has affected various roles that are performed by the insurance authority and self regulatory organizations. For example, it has affected training of consumers and monitoring of the industry. It has also affected the investigation and handling of cases in the insurance industry. Also, it has affected research and development in the organization. This is because the insurance authority does not have adequate workers to carry out the functions listed above (Howlett, 1997)[24].
In addition to having an ineffective structure, the self regulatory organizations and the insurance authority are not monitored by another body. The insurance authority does not monitor the self regulatory organizations as expected. The government has not established an independent body to monitor the insurance authority and the self regulatory organizations. This has made it hard to evaluate the performance of the insurance authority and the performance of the self regulatory organizations. It has also made it difficulty to prevent misuse of power by the insurance authority and the self regulatory organizations. Most of the self regulatory organizations misuse power and this affects the consumers negatively. For example, the self regulatory organizations might not apply appropriate disciplinary measures and investigation and this affects the behavior of the insurance intermediaries. Subjecting the insurance authority and the self regulatory organizations to checks and balances can help enhance discipline in the insurance industry by analyzing the performance of the self regulatory organizations. The independent insurance authority proposed will be monitored regularly by an independent body so as to be able to prevent unethical issues. The independent insurance authority will be more effective than the insurance authority as it will maintain a close relationship with the self regulatory organizations so as to monitor their performances. Hence, the reason most people including policy holders have supported the new independent insurance authority (Hong Kong government information services, 2007)[25]. The weaknesses of the self regulatory organizations have forced the government and other organizations in the country to look for ways to make the insurance industry in Hong Kong stable. The new regulatory system is supposed to help eliminate the weaknesses of the current organizations. For example, it will help educate the policy holders and insurance intermediaries. Also, it will help enhance development and research on current issues facing consumers and hence promote health industry growth. The independent insurance association will help improve transparency and integrity in the industry and thus improve customer loyalty. The current organizations do not provide adequate information to policy holders and insurance brokers and this has slowed growth in the industry and led to more problems in the organization (Hong kong economic services branch& Hong kong economic analysis division, 1991)[26].
Effectiveness of the self regulatory organizations
Though the self regulatory organizations have numerous weaknesses, they have been effective. First, the self regulatory regimes have been effective in overcoming financial crisis in the country for the last few years. For example, the self regulatory organizations were able to overcome financial crisis that resulted from tsunami. In addition, the organizations were able to overcome the financial crisis in 2008. The financial crisis had negative impact on economy in different countries like US and Hong Kong. For example, the financial crisis affected growth in different industries like insurance industry. This is because it led to low demand for products and services. It also affected financial systems in the country. The self regulatory organizations played an important role in overcoming the financial crisis. Most people in different countries like Hong Kong have supported self regulation because of the benefits it has on the industry. The proponents of self regulation argue that self regulatory organizations contribute great in the financial market as they help improve the efficiency of the markets. This is because the self regulatory organizations offer a mechanism for expertise to use to develop regulatory policy. Also, the policies developed by self regulatory organizations help sell the insurance industry to the outside world (World trade organization, 1999)[27].
The self regulatory organizations have been effective in regulating the insurance intermediaries and monitoring them because there is no conflict in roles. The self regulatory organizations do not have conflicting roles as each organization has its own roles. In addition, the insurance intermediaries and insurers have the right to choose which organization to belong to. For instance, insurance intermediaries can register with the professional insurance brokers association or other organizations that are registered by the insurance authority. The differences in roles between the two organizations have made it easy for the self regulatory organizations to monitor the insurance intermediaries like insurance brokers. Though the self regulatory organizations are placed under the insurance authority, the two organizations have different roles. For example, the insurance authority oversees the regulation of the insurance market and the functioning of the self regulatory organizations. The insurance authority does not supervise the insurance brokers and insurance agents directly, but it supervises the insurance intermediaries through the self regulatory organizations. Hence, the insurance authority does not interfere with roles played by the self regulatory organizations. This has made it easy for the self regulatory organizations to carry out their roles effectively. On the other hand, the independent insurance authority and the self regulatory organizations have conflicting roles. This is because the self regulatory organizations are allowed to carry out their functions under the new regime. Also, the independent insurance authority performs roles that are similar to the roles played by the self regulatory organizations. For example, it supervises the insurance intermediaries directly and thus affects the monitoring of the insurance intermediaries. The separation of powers in the self regulatory regime has enabled effective management of the insurance intermediaries (International monetary fund, 2000)[28].
Apart from having distinct roles, the self regulatory organizations have distinct policies and procedures. For example, the professional insurance brokers association has policies and regulations that are different from other organizations. The distinct principles have made it easy for the self regulatory organizations to monitor the insurance brokers. This is because the insurance brokers are allowed to register with the organizations. This ensures the self regulatory organizations monitor the behaviors of the insurance intermediaries and ensure smooth running of the insurance industry (Vishwanath &Krishnamurti, 2009)[29]. Moreover, the self regulatory organizations have been effective because they are flexible and adaptive. Flexibility and adaptable is one of the advantages of self regulation. This is according to studies carried out by various researchers to determine how the self regulation affects the regulation of various industries like insurance industries. The study revealed that flexibility and adaptability has made it easy for self regulatory organizations to perform well. This is because they are able to adapt to various changes in the market. For example, they are able to adapt to financial changes in the market. Like other self regulatory organizations, the self regulatory organizations in Hong kong insurance industry are flexible and adaptable. This has made it easy for the organizations to monitor the insurance intermediaries effectively. For example, they have been able to solve complaints brought by different intermediaries. Moreover, they have been able to supervise and inspect activities carried out by insurance intermediaries. Though the insurance intermediaries do not have enough powers, they have been able to regulate the insurance industry well. This is evidenced by the good performance of the insurance industry. The insurance industry in Hong Kong has been doing well for the past few years due to self regulation framework (Bloomerg, 1997)[30].
Another advantage associated with self regulation and self regulatory organizations is better performance of the market. Most of the markets that are regulated by self regulatory organizations have performed well for the last few years. This is due to good regulation of the market. The self regulatory organizations have been able to promote the insurance industry and this has enhanced the competitiveness of the insurance industry. The self regulatory organizations have also helped improve the behavior of the insurance intermediaries and thus improved the provision of services in the industry (Dow Jones&Co, 1996)[31]. The self regulatory organizations have been effective in monitoring the insurance intermediaries as they have adequate financial support. The self regulatory organizations can either be placed under the government or not. Self regulatory organizations that are placed under the government get enough financial support and this makes it hard to solve various issues in the organizations. Though the current self regulatory regime does not have financial independence as expected, it has been effective in controlling the insurance market. This is evidenced by the growth of the insurance industry. Moreover, studies have shown that self regulatory organization do not lead to financial burden among the insurance intermediaries. This is because they do not rely on the insurers and insurance intermediaries for financial support. For example, the self regulatory organizations in Hong Kong and the insurance authority do not depend on insurers and insurance intermediaries for support. This has made the self regulation system effective due to minimal conflicts between the insurance intermediaries and the self regulatory organizations. The self regulatory have lowered regulatory burdens on firms as they are not required to contribute funds to manage the business (British Broadcasting corporation monitoring services, 1999)[32].
Further, the self regulatory organizations have been effective in monitoring insurance intermediaries like brokers and agents because of the commitment and loyalty in the industry. Most of the self regulatory organizations in the insurance industry have been committed to enhance development in the insurance industry. They have also been committed in improving the conduct of the insurance intermediaries in the industry by ensuring the insurance intermediaries act according to the law. This is by checking documents presented by the insurance intermediaries regularly so as to be able to detect malicious activities. Additionally, the self regulatory organizations have encouraged registration of insurance intermediaries so as to ensure effective monitoring of their behaviors. The insurance intermediaries are allowed to register with any of the self regulatory organizations. Most people in Hong Kong have linked the performance of the insurance industry with the commitment of the self regulatory organizations. A large percentage of studies carried out by various people after the government proposed the independent insurance authority show that most of the people in the society prefer the current regulatory framework. This is because of its effectiveness. Also, the self regulatory organizations have been effective because they have used the knowledge and expertise from different parties effectively. Self regulation encourages different people in the industry to work together. For example, the self regulatory organizations, insurers and insurance intermediaries have to work together so as to ensure the industry is performing well. The parties use knowledge and expertise from different people in the industry to enhance development in the area. Though self regulation regime does not encourage development research in the industry, most industries have been able to perform well due to diversity. The presence of self regulatory organizations in the insurance industry leads to diversity. This is because different organizations have different practices and ideas. This makes it easy for the organizations to perform well. For example, the professional insurance brokers association and other self regulatory organizations approved by the insurance authority have different rules and regulations. Hence, this has lead to diversity in the industry (Norton, Li Huang &et al, 2000)[33].
An overview of the independent insurance authority
A study carried out by Price house Coopers and other researchers showed that the regulatory regime in Hong Kong is not inline with international practices. This is because the office of the commission if authority is not an independent regulatory. The findings from the study forced the government to enhance the self regulatory regime in the country so as to enhance market development. In addition, the government decided to enhance the current regulatory regime so as to improved market stability and protect investors in the country. The government proposed a new regulatory body so as to align the office of the commissioner of insurance with the international practices. The independent insurance authority is aimed at enhancing stability in the insurance industry. In addition, the independent insurance authority is also aimed at protecting the interest of policy holders currently in the industry and insurance intermediaries. The insurance industry in Hong Kong has been faced by numerous challenges, though it is considered the best. This is because of the self regulatory regime. For instance, the insurance industry has found it hard to meet the needs of different policyholders in the industry unlike other countries. This is mainly due to conflict of interest and poor policies. Also, the insurance industry has not been able to keep with the latest development in insurance sector. This is due to lack of research on current issues and development. Poor development and lack of customer loyalty has affected the industry negatively and hence the need to change the self regulation regime. Most people argue that the creation of an independent insurance authority will help boost the performance of the industry and hence meet the needs of different parties in the industry.
The independent regulatory regime was first considered in 1990, but the government was not able to establish the new regulatory regime due to lack of support. The financial services and the treasury bureau proposed to develop an independent regulatory body to manage the insurance industry on July 2010.The financial services and the treasury bureau argued that developing the independent regulatory body will ensure all the activities in the insurance industry are carried out according to the internal practice. The independent regulatory body will operate independently from the government. This will ensure the government does not interfere with the running of activities in the insurance industry. This is in contrast to the office of commission of insurance which is regulated by the government. The office of commission of insurance has not been effective because of lack of independency. Additionally, the independent regulatory body will be financially independent unlike other organizations. Studies have shown that the self regulatory body has not been able to carry out its activities well because of financial constraints. The independent regulatory body will have 237 employees and a budget of $240 million per year. The body will be supported by the license fees that are paid by insurers and sales persons. Also, it will be supported using funds from the levy on insurance premiums that are paid by policyholders. The independent insurance authority is expected to be running by 2013.The body will be able to license all the insurance brokers from various firms like banks and insurance companies. The authority will also preside over complaints that are filed by the agents and insurance companies. The HKMA will also have the power to investigate insurance complaints against bank based brokers who sell 30% of the insurance policies issued per year (Berry, Arner &Johnstones, 2006)<a title=”” name=”_ftnref34″ href=”file:///C:/Users/Gues
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