Member Article

The Insurance Authority has now gazetted the Insurance (Special Purpose Business) Rules. They will come into effect on 29^th March, 2021, the same day as the Insurance (Amendment) Ordinance which makes provision for special purpose insurers (see our Client Alert dated 27 May 2020 regarding special purpose insurers).

The Rules restrict the sale of insurance linked securities.

Insurance linked securities are securities issued through insurance securitisation i.e. any debt or other financing arrangement entered into by an insurer with an investor under which repayment or return to the investor is linked to a contract of insurance effected or carried out by the insurer.

The Rules restrict a person from entering into an agreement or inviting another person to enter into an agreement to acquire, subscribe or underwrite insurance linked securities or to dispose of insurance linked securities to that other person unless:

1. the other person is an eligible ILS investor;
2. the other person is not specifically excluded; and
3. the consideration for which the insurance linked securities are to be acquired, subscribed, underwritten or disposed of is not less than US$250,000 or equivalent in any other currency.
   
   

Eligible ILS investors are:

1. any recognised exchange companies, recognised exchange clearing house, recognised exchange controller or recognised investor compensation company or other corporation authorised to provide automated trading services under the Securities and Futures Ordinance;
2. a licensed corporation or registered institution under the Securities and Futures Ordinance or other regulated corporation providing investment services outside Hong Kong;
3. a bank licensed under the Banking Ordinance or a bank regulated outside Hong Kong;
4. an insurer authorised under the Insurance Ordinance or other regulated person carrying out insurance business outside Hong Kong;
5. certain kinds of collective investment schemes;
6. any government or institution which performs the function of a central bank or multinational agency; or
7. certain group companies of entities referred to in paragraphs (b) or (c).
   
   

Specifically excluded from eligible ILS investors are:

1. certain other kinds of collective investment schemes or their operators;
2. MPF schemes, funds or trustees or service providers to them; and
3. ORSO schemes or their administrators.
   
   

There are criminal penalties for breach of the restriction including a fine of up to HK$200,000 and imprisonment for two years.