Alleviating Hardship of SMEs in Taking out Insurance

Speech of the Hon KP Chan on Motion on Alleviating Hardship of Small and Medium Enterprises in Taking out Insurance at the Legislative Council on December 14th, 2011

Lately, certain industries are having problems in insuring for employee compensation and vehicle third-party risk. Actually, not only are these industries frustrated, the insurance industry is disturbed as well. They are both victims. Given sustained losses of these two classes of underwriting, insurance companies are operating under great stress and relying on cross-subsidization to maintain service.

Employees’ compensation or labour insurance and vehicle third-party risk or vehicles third-party insurance are similar. They offer protection for compensations in case of casualties. Both are suffering from persistent deficits. There are some 50 licensed underwriters of labour insurance and all are very cautious. Why? For the last 20 years, they have accumulated some HK$8 billion deficits already. Frankly, they are running out of steam in cross-subsidization.

There are many causes of prolonged losses. One culprit is understatement of staff and payrolls on insurance proposal to save premium. Underwriters have discovered many such cases. In one incident, the insurer declared only nine employees but it was later discovered that it had more than 60. In another incident, payroll was grossly understated and the actual sum was more than ten times of the declared. As labour insurance is accepted on the basis of total payroll and identities of individuals are not required, the underwriter is still liable to cover all workers even though there is understatement. Frankly, they are not uncommon and are open secrets. Vehicles third-party insurance for transport operators has been equally disturbing for years.

As some underwriters have withdrawn from the market or others have even gone bankrupt in recent years, the issue now comes to light as transport operators are finding it more difficult to get insured. According to published figures, vehicles third-party insurance for taxi, minibus and lorry is money-loser for years. For instance, taxi insurers lost over HK$111 million from 2006 to 2009. There was a small surplus of HK$17 million last year. If the unrecoverable loss of HK$1 billion of the defunct Starlite Insurance were taken into account as well, vehicles third-party insurance for taxi would be in red for at least another ten years as the company used to have 50 percent of the market in its heydays.

The insurance industry is compelled to raise premium. Last year, the accident rate of private cars was 15.5 per thousand. The accident rate of taxi was 223.6 or 14 times higher, and the rate of minibus was 263.7 or 16 times higher. Although these rates are not strictly comparable, they are illustrative of the hardship of underwriting vehicles third-party insurance for transport operators. I wonder if my learned colleagues realize that claims have been surging in amount. If there were serious injuries, a single claim could be in tens of millions. Take the case of a renowned medical doctor in a traffic accident at Happy Valley many years ago as an illustration. It was settled out of court at a sum of tens of millions. All of you may imagine the hardship of underwriting vehicle insurance.

That said the situation has been aggravated by the emergence of claim agents and champerty. Claim agents often abet victims to exaggerate injuries or even make false claims to solicit payment by deception. These malpractices have led to substantial losses in both labour insurance and vehicles third-party insurance. The insurance industry has been joining hands to clamp down these unscrupulous and illicit activities. If these actions were effective and fraudulent losses were mitigated, they would help alleviate the frustration of those insurers.

However, unscrupulous claims through agents could succeed only because there are grey areas for abuse. Firstly, the victim would exaggerate injuries or even made false claims to get sick leave certificates by deception. More often than not, doctors in Hospital Authority are rather lenient in giving leave certificates for six months or more on various considerations.

According to industry statistics, some 1,400 cases of claims for injuries at workplace in 2006 were supported by sick leave certificates for six months or more. Such cases rose annually to reach 2,200 in 2010. These figures reflect that the situation is getting out of control. My Amendment calls for the Hospital Authority to clamp down illicit practices of exaggerated or fraudulent claims for long sick leaves. There are several measures to consider. One way is to require the endorsement of a second or senior doctor if long sick leaves of six months or more are requested. The insurance industry has made such proposal on many occasions and I have also brought it out at the Joint Panel on Transportation and Insurance of this Council earlier.

Secondly, there are loopholes in legal aid services for exploitation of champerty. Under current arrangements, applicants are allowed to choose legal representatives of their own. Thus, traffic and occupational victims would be persuaded to seek legal aids and collaborate with lawyers in making claims. Accordingly, public resources would be misdirected for champerty through legal aids. Again, these malpractices are not unknown to related industries. As legal aids are civil rights, any change in practice would have ramifications. There is no easy solution for such malpractices. I urge the authorities to propose measures that would strike the right balance among different interests.

Thirdly, insurance frauds are complicated. When insurance companies report crimes to the Police, frontline officers often could not act promptly to clamp down fraudulent activities. My second Amendment asks the Police to set up a channel for the public and insurance companies to report insurance crimes. I have raised the same proposal at the Joint Panel and the Police have undertaken to arrange for Commercial Crime Bureau to coordinate and follow up these reports.

Furthermore, my last Amendment asks the Secretary for Justice to prosecute civil contempt to court as means of deterring fraudulent insurance claims with false reports. In lodging insurance claims, the principal is actually making a legal petition for payment under civil proceedings. Among “court” documents submitted in support is Statement of Truth. If one makes a false declaration, one would commit an offence of civil contempt to court. As it is an indictable offence, the insurance industry is of the view that public prosecution would deter fraudulent claim declarations. It is believed that this would help effectively curtail insurance frauds.

All these issues could hardly be put right instantly. The Federation of Insurers has invoked the Employees’ Compensation Insurance Residual Scheme with a view to helping employers who may have problems in insurance. The Federation has also stepped up its enquiry hotlines. This reserve market, designed for 19 high risk industries, is now open to employers who are unable to insure for labour compensation. They may turn to the Federation for assistance of the Residual Scheme. However, we must realize that the Residual Scheme is underwriting high risk and thus operated on sophisticated risk management. Employers are urged to submit correct information in detail on application.

In the long run, it would require the joint effort of employers, the insurance industry and the Government to clamp down these illegal activities as ultimate resolutions. This Council has set up a Joint Panel and all parties are working hard to address root causes. I wish that the Hospital Authority, the Police and Secretary for Justice would actively participate in the search of permanent solutions.

I now turn to the Amendment of the Hon Lee Cheuk-yan on establishing a centralized compensation fund. In my view, if these crucial issues remain outstanding, the fate of sustained insurance underwriting deficits would hardly be reversed by the establishment of a centralized fund. On the contrary, such deficits would only accumulate because the public sector is inherently less efficient in operations and risk management. Moreover, fraudulent activities would only increase resulting in the public purse being robbed. I cannot support his Amendment.
With these remarks, I move that the Motion be amended as tabled.

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