HONG KONG SAR, CHINA Law and Practice Contributed by: Edwin Northover, Jan Buschmann and Tony Dymond, Debevoise & Plimpton
6.6 Consumer Contracts or Reinsurance Contracts From a legal perspective, the position is generally the same for consumer contracts and reinsurance contracts. However, detailed regulatory obligations apply to direct insurers with regard to the issuance of policies to their policyholders, such as processes in relation to application forms, suitability assessments, disclosure of information and issuance of policies. Most of those regulatory obligations do not apply to reinsurance contracts. 7. Alternative Risk Transfer (ART) 7.1 ART Transactions New ILS Regime Hong Kong introduced a specific regime in relation to insurance-linked securities (ILS) in 2021, and a num- ber of ILS have been issued under this regime to date. The protection provided by the issuer of the ILS is treated as insurance for the purpose of Hong Kong insurance law but is subject to specific rules. Requirements for Issuance In order to issue ILS under the Hong Kong regime, the issuing entity must be authorised by the IA for “spe- cial purpose business”, which is a separate class of insurance. In order to be authorised, the entity must normally appoint two or more directors and an admin- istrator, all of whom must be “fit and proper” for the purposes of Hong Kong regulation (including by virtue of the administrator having the relevant experience with regard to ILS). Another key criterion is that the special purpose insurer must be fully funded – ie, its assets (which are typically held in a trust account) must be sufficient to meet the liabilities of the insurer in all reasonably foreseeable circumstances. ILS can only be sold to certain types of institutional investors specified by Hong Kong legislation. Challenges The current challenges with regard to ILS in Hong Kong are that:
• it is a fairly new product in the region; • it competes with traditional reinsurance; and • the issuance of ILS in the local market takes longer and is procedurally more challenging than in estab- lished ILS markets. There is also a perceived lack of professionals with the requisite expertise when compared to larger ILS markets, such as Bermuda. 7.2 Foreign ART Transactions There is no specific regime for the recognition of over- seas ART transactions. Whether such transactions will be treated as reinsurance for the purposes of the Hong Kong regulatory regime would therefore depend on whether they meet the common law definition of insurance (see 6.4 Legal Requirements and Distin- guishing Features of an Insurance Contract ). 8. Interpreting an Insurance Contract 8.1 Interpretation of Insurance Contracts and Use of Extraneous Evidence Extraneous Evidence Insurance contracts are generally interpreted in the same way as other contracts. The ordinary meaning of words is typically the starting point for interpreta- tion, though circumstances may be taken into account as part of the process. While evidence in relation to market understanding and customs in the market are admissible in evidence, previous negotiations between the parties and their subjective intent are generally not admissible. The contra proferentem rule generally applies for the benefit of the insured where there is ambiguity in the policy wording, in particular with regard to exclusions from policy coverage. In those cases, the interpreta- tion that is more favourable to the policyholder will generally be adopted. The rules are generally the same for consumer and business contracts. However, the courts are more likely to strictly follow the wording of the contract in a business context. In the interpretation of reinsurance contracts, custom and market understanding play a
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