Circular to Licensed Corporations which are Participants of The Stock Exchange of Hong Kong Limited and/or Hong Kong Futures Exchange Limited – Licence Holders Insurance for Exchange Participants
25 Apr 2017
This circular concerns corporations which are licensed under the Securities and Futures Ordinance (Cap. 571) (the “SFO”) and are under the following categories:
Category 1: Participants of The Stock Exchange of Hong Kong Limited and licensed for Type 1
regulated activity (i.e. dealing in securities); and
Category 2: Participants of the Hong Kong Futures Exchange Limited and licensed for Type 2
regulated activity (i.e. dealing in futures contracts).
It informs you of the arrangements of the licence holders insurance scheme applicable to you for the scheme year from 1 April 2017 to 31 March 2018 (both dates inclusive) and potentially another three scheme years from 1 April 2018 to 31 March 2021.
The insurance requirements
Under the SFO, corporations that are licensed to carry on certain regulated activities are required, as a condition of their licences, to take out and maintain insurance in the manner prescribed by the Securities and Futures (Insurance) Rules (Cap. 571AI) (the “Rules”).
The Rules provide, amongst other things, that the licensed corporations in the above categories must take out and maintain insurance in relation to specified risks, for not less than an amount specified in the Rules, when the SFC has approved a master policy of insurance applicable to them.
Arrangement of the scheme and approval of master policies of insurance
In order to arrange for an appropriate insurance scheme for the purposes of the Rules, an Industry Working Group (the “IWG”) comprising representatives of various brokers’ associations and brokerage houses was formed[1]. It operates with secretariat support from the SFC.
IWG members unanimously decided to re-appoint Jardine Lloyd Thompson Limited (“JLT”) as the insurance broker and scheme administrator for the scheme year 2017/2018 and potentially another three scheme years from 2018/2019 to 2020/2021. For the scheme year 2017/2018, JLT has already arranged the placements of two master policies of insurance covering respectively the licensed corporations in Category 1 and those in Category 2. The master policies of insurance are co-underwritten by Antares Syndicate 1274 (Lloyd’s of London) (50%), AIG Insurance Hong Kong Limited (15%), MSIG Insurance (Hong Kong) Limited (15%), Chaucer Syndicate 1084 (Lloyd’s of London) (10%) and Markel Syndicate 3000 (Lloyd’s of London) (10%).
Under each master policy of insurance, an insured participant will be indemnified for financial losses due to fidelity risks relating to its activities of dealing in securities and/or futures contracts (as the case may be), subject to an indemnity limit of $15 million per regulated activity per year and a deductible amount of $3 million per claim/loss. For details of the risk coverage, indemnity level, deductible amount and other terms and conditions, please refer to the insurance documents to be distributed to you separately by JLT.
Meanwhile, the SFC will provide JLT with the information necessary for the arrangement of the master policies of insurance to be approved pursuant to the Rules for the scheme year 2017/2018. Such information will include the names of the participants covered under the policies, their correspondence details and information required by JLT to allocate the gross premium among the participants based on the methodology agreed by the IWG.
The premium for the scheme year 2017/2018 will be based on the claims amounts for the preceding three years.
Premium allocation
For each scheme year, the IWG seeks professional advice from the selected insurance broker regarding the premium allocation methodology with a view to catering for any unforeseen circumstances and looking for possible refinements to the methodology where appropriate.
Basic premium and variable premium
To allocate the gross premium among the participants, the IWG has approved the same allocation methodology adopted in the last scheme year, whereby the premium amount that an insured participant is required to pay equals the sum of a minimum basic premium and a variable premium.
Minimum basic premium (20% of the gross premium quoted for each Category) represents the administration cost that insurers accord to the scheme. This portion will be equally shared by all participants in the same Category. Variable premium (the remaining 80% of the gross premium) will be allocated based on the annual turnover[2] of individual participants during the previous calendar year as a proportion of the total turnover of all participants under the same Category, subject to adjustments for any premium loading and/or discount (mentioned below) where applicable.
Premium loading
As in the previous year, a fixed premium loading amount of $15,000 will apply to a participant with respect to each claim notification lodged during the preceding scheme year (i.e. from 1 April 2016 to 31 March 2017).
In addition, a premium loading based on paid claims will continue to apply to participants that have had claims actually paid above the deductible with reference to the following loading factors: -
|
|
Loading factors to be applied |
|
|
Paid claim in excess of |
Paid claim of $5 million |
|
|
1st year after the paid claim |
60% |
30% |
|
2nd year after the paid claim |
48% |
24% |
|
3rd year after the paid claim |
36% |
18% |
|
4th year after the paid claim |
24% |
12% |
|
5th year after the paid claim |
12% |
6% |
The paid claims loading will be computed as a percentage (as listed above) of the premium amount that the insured participants would have been required to pay had there been no claim(s) paid.
The gross premium, after deducting the premiums shared by those participants with additional premium loading, will then be allocated amongst those participants without such claims.
Premium discount in relation to turnover
As in previous year, a premium discount will reduce the premium payable by any Category 2 participant whose annual turnover in the last calendar year falls within the following bands:-
A participant’s annual turnover as a percentage of the market total |
Discount to be applied to that participant’s premium share |
Over 10% to 20% |
12% |
Over 20% to 30% |
24% |
Over 30% to 40% |
36% |
Over 40% to 60% |
48% |
Over 60% |
60% |
The amount of the discount will be returned to the pool and allocated among the rest of the participants proportionally according to their respective turnovers. The total premium borne by the entire industry, therefore, will not change.
Scheme administration
As the scheme administrator, JLT is responsible for implementing and providing administrative services to the participants. It will allocate the gross premium based on the above-mentioned methodology and send you the debit note and insurance documents.
If you have any queries on the insurance scheme, please contact either the licensing manager responsible for your firm or the scheme administrator: -
Jardine Lloyd Thompson Limited
5th Floor, Cityplaza Four
12 Taikoo Wan Road
Taikoo Shing
Island East
Hong Kong
Phone: 2864 5333
Contact Persons:
Ms Celine WONG (Phone: 2864 5479)
Mr Anthony LI (Phone: 2864 5344)
Mr James STUART-CLARKE (Phone: 2864 5427)
Ms Mabel CHIU (Phone: 2864 5348)
Licensing Department
Intermediaries Division
Securities and Futures Commission
End
[1] The IWG is chaired by Mr Anthony Espina, and comprises representatives of The Institute of
Securities Dealers Limited, Hong Kong Securities Association Limited, Hong Kong Securities
Professionals Association, BOCI, DBS Vickers, KGI, and Bank of America Merrill Lynch.
[2] As reported by licensed corporations under “Total value of transactions in securities dealing”
and/or “Total number of contracts of dealing in futures and options contracts” in their monthly
financial returns submitted to the SFC.
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Page last updated: 25 Apr 2017