The Insurance Authority (IA) of Hong Kong has endorsed the new Reference Checking Scheme introduced by the Hong Kong Federation of Insurers (HKFI).
Effective from Sept. 1, this initiative mandates that authorised insurers engaged in long-term business must adhere to the scheme.
The scheme aims to address the issue of “rolling bad apples,” where some insurance intermediaries avoid accountability for misconduct by moving between employers without disclosing their past behaviour.
The new mechanism seeks to prevent these individuals from damaging the reputation of the insurance sector.
“’One bad apple spoils the whole barrel,’ so the old adage goes. In the context of the scheme, the phenomenon of ‘rolling bad apples’ refers to those few individual insurance intermediaries who, in seeking to evade the consequences of their poor conduct, resign from one principal and seek appointment with a new principal without their problematic behaviour being disclosed. These isolated ‘bad apples’ must not be allowed to spoil the reputation of the insurance market, by continuing to roll from one principal to another without accountability for their actions,” the IA said in a letter to chief executives of authorised insurers carrying on long-term business in Hong Kong.
Under the scheme, when a long-term insurer (recruiting insurer) considers hiring an agent who has worked for another insurer (responding insurer) within the last seven years, they must conduct reference checks.
The process involves using a standardised template, and responding insurers must reply within a specified timeframe.
The recruiting insurer retains the discretion to proceed with the appointment, even if adverse information is found, but must document their decision, which will be reviewed by the key person in control function for intermediary management (KPIM) and made available to the IA if requested.
Initially, this scheme applies to individual agents in the long-term business segment, which constitutes the largest group of licensed intermediaries in Hong Kong. Plans are in place to extend the scheme to other types of intermediaries as experience is gained.
The IA’s endorsement of the scheme is part of its broader strategy to safeguard policyholders and uphold conduct standards in the insurance industry.
According to Section 13AE of the Insurance Ordinance (IO), insurers must get IA approval for appointing key persons in control functions, including the KPIM, who oversees intermediary management. This role includes ensuring compliance with the IO and IA guidelines.
The IA, which also welcomed the government’s recently released consultation conclusions and legislative proposals regarding the establishment of a company re-domiciliation regime, expects long-term insurers to implement thorough due diligence and vetting procedures when onboarding new agents. The responsibility for these controls lies with the insurer’s board of directors and controllers, including the KPIM. Any weaknesses in these processes may lead to regulatory actions by the IA.
Participation in the scheme will be seen as a minimum internal control measure for assessing prospective agents. Non-participation or repeated non-compliance could indicate systemic issues in an insurer’s controls, prompting increased scrutiny from the IA.
Insurers failing to meet their obligations under the scheme may also face closer examination of their recruiting and licensing processes.
The scheme, resulting from extensive consultations between long-term insurers, intermediary representatives, and the IA, represents a collective effort to maintain professional standards and build trust in Hong Kong’s insurance market.
