Hong Kong Insurance Authority Issues Revised Guideline on Governance and Management of Fund(s) of Participating Business

On 19 September 2025, the Hong Kong Insurance Authority (Insurance Authority) issued a revised Guideline 34 on Governance and Management of Fund(s) of Participating Business (GL34), setting out expectations for sound and prudent business practices to be implemented and followed by authorized insurers and their board of directors (Board) regarding the governance and management of participating long-term insurance policies. The revised GL34 will take effect on 31 March 2026 other than Section 4 (Corporate Policy) which will be effective from 30 June 2026.

The revised GL34 places primary emphasis on the Board’s duties and obligations to uphold the principle of equitable and fair treatment of customers, ensuring an equitable balance between the interests of shareholders and policy holders in all matters concerning participating funds.

This alert is intended to provide a summary of the principal changes introduced by the revised GL34. For a comprehensive understanding of all applicable requirements, readers should refer to the full text of the revised GL34 as published by the Insurance Authority, available here.

 

Corporate Governance and Oversight: Establishing a Participating Business Committee

Each authorized insurer is required to establish a Participating Business Committee (PBC) to provide independent and objective advice to the Board in respect of applicable participating funds, including but not limited to recommendations made by the Appointed Actuary (as defined under Insurance Ordinance (Cap. 41 of the laws of Hong Kong) on the allocation of distributable surplus or profits and declaration of dividends or bonuses. The PBC is required to function with full independence, reporting directly to the Board.

Composition of the PBC

The PBC must comprise no fewer than three members, with at least half being independent of the authorized insurer; the chairperson is likewise required to be independent. Independence is assessed with reference to factors such as prior employment, remuneration arrangements, business affiliations, and familial connections. Collectively, the PBC should comprise members with an adequate spread of skills, knowledge and relevant experience, including legal, accounting, financial, actuarial, investment and risk management with its size and composition commensurate with the scale, complexity, and risk profile of the relevant participating funds. The Insurance Authority is not likely to consider a PBC member independent if, within the past three years, the member, inter alia, has been or is a shareholder controller of the authorized insurer; an employee or director (including independent non-executive director) of the insurer, a shareholder controller, or a group company; has received variable remuneration or participated in share option or performance-related pay schemes; or has had a material business relationship with the insurer. Independence may also be impaired by significant links with the insurer’s directors, close family ties with relevant persons, serving as a PBC member for more than nine consecutive years, or any other circumstances giving rise to a conflict of interest.

An authorized insurer should establish policies and procedures for the nomination, appointment and tenure of PBC members. PBC members should be appointed for a fixed term, typically three years, with the possibility of reappointment. If a PBC member is appointed, or if a PBC member’s appointment ends before completion of the full term, the insurer should notify the Insurance Authority within one month after the appointment date or the termination date, as applicable. In the case of termination before completion of the full term, the insurer should provide reasons for early termination and a replacement plan. While prior approval from the Insurance Authority is not required, the Insurance Authority may object to the appointment of a PBC member if it considers the member unsuitable. Before issuing a written notice of objection to the authorized insurer, the Insurance Authority will first discuss its intention and reasons with both the insurer and the PBC member. The insurer and the PBC member may then make written or oral representations, which will be considered by the Insurance Authority before any notice of objection is served.

If an authorized insurer’s total insurance liabilities (gross of reinsurance) for all applicable participating funds are less than HKD 1 billion as at 30 September 2025, or fall below this threshold for four consecutive reported quarters after that date, the insurer may appoint a PBC with two members or replace the PBC with a Participating Business Advisor (PBA). In either case, the PBA or at least one PBC member should be independent or an INED. If insurance liabilities rise to HKD 1 billion or above for four consecutive quarters after 30 September 2025, the insurer must establish a PBC in accordance with the relevant requirements within six months after the end of the fourth quarter.

The PBC is expected to convene at least annually, with a quorum comprising no fewer than half of its members with at least half of the quorum being formed by independent members, and is required to report directly to the Board at least once per year.

Roles and Functions of the PBC

When advising the Board, the PBC should consider whether policy holders are being treated fairly, with due regard to the rights and interests of different groups, classes, or cohorts of policy holders. The Insurance Authority expects the Board to seek and duly consider advice from the PBC on key matters relating to the management of applicable participating funds. In giving its advice, the PBC should consider whether policy holders are being treated fairly, having regard to the rights and interests of different groups, classes, or cohorts. At a minimum, the PBC should consider, inter alia: (a) whether the level of future discretionary benefits provided in the benefit illustration is clear, fair and reasonably achievable; (b) the policy and mechanism for allocation of distributable surplus/profits and dividends/bonuses declaration mechanism (including any smoothing mechanisms), taking into account reasonable expectations of policy holders (including but not limited to their expectations relating to reasonable achievement of discretionary benefits), fairness and equity, as well as sustainability; (c) fairness, equity and reasonableness in allocation of expenses and charges to and within applicable participating funds; (d) the risk and investment profile of applicable participating funds, including the appropriateness of the risk appetite and risk level taken, the management and reasonable balance of risk and return, etc.; (e) the authorized insurer’s strategy for future sales of insurance policies in applicable participating funds and their impact on surplus; and (f) the authorized insurer’s communications with existing and potential policy holders relating to applicable participating funds, including fairness and transparency of disclosed information which may affect policy holders’ decisions.  

The recommendations and reports of the PBC must be made available to the Insurance Authority upon request. Additionally, the PBC should respond directly to any enquiries from the Insurance Authority concerning the performance of its functions.

Board's Support to the PBC

Authorized insurers are required to provide the PBC with the necessary resources to enable the PBC to give its objective and informed advice. This includes prompt notification by the Board or management of any material changes in business plans, practices, or other circumstances affecting the fair treatment of participating policy holders; adequate support from internal resources, access to external professional advice at the insurer’s expense, and sufficient time for PBC members to give fully considered input; and access to data and systems reasonably required by the PBC, such as information on customer complaints.

Should the Board elect not to follow the advice of the PBC, it must inform the PBC accordingly. If the PBC considers that such deviation may adversely affect the interests of policy holders, it should notify the Board and promptly inform the Insurance Authority of the potential impact on policy holders.

Enhanced Role of the Appointed Actuary

The revised GL34 further underscores the pivotal role of the Appointed Actuary in advising the Board, particularly in relation to discretionary decisions. It is the Appointed Actuary's duty when designing products that include non-guaranteed benefits to ensure that there is a fair chance of policy holders achieving projected non-guaranteed returns. The Appointed Actuary is required to report to the Board at least annually (and more frequently if required), recommend the allocation of distributable surplus or profits and the declaration of dividends/bonuses, and provide a written opinion regarding the allocation of expenses and charges covering at a minimum: (a) consistency of the exercise of discretion with the corporate policy on governance of the participating business; (b) potential impact of the exercise of discretion on the interests of the policy holders; (c) whether the recommendation or allocation may adversely impact the sustainability of the participating business; and (d) any deviations from information previously communicated to existing or potential policy holders (including but not limited to benefit illustrations) resulting from the recommendation or allocation. The PBC shall also independently advise the Board on such recommendations, ensuring alignment with the principles of fairness, equity and sustainability.

 

Corporate Policy Requirements

With effect from 30 June 2026, authorized insurers must establish a comprehensive corporate policy addressing the allocation of distributable surplus or profits between shareholders and participating policy holders as well as the declaration of policy holder dividends or bonuses and other discretionary benefits.

The corporate policy must be clearly documented, approved by the Board, and made available to the Insurance Authority upon request. It may comprise a single document or a set of documents, but must be clearly indicated as the corporate policy.

The policy should have regard to the principles set out in GL34 and provide sufficient details that allow the Insurance Authority and any other knowledgeable independent reviewer to assess the insurer’s ongoing compliance with those principles. Such policy should also be consistently applied from year to year and not be subject to arbitrary changes, and reviewed at least once per year to ensure it remains appropriate, taking into account the development of risks, market environment, product sustainability, and evolving best practices. The policy, including the dividends/bonuses declaration mechanism, must also be made available to the Insurance Authority for regulatory review. The Insurance Authority may require the insurer to appoint (at the insurer's expense) an independent party to assess and report on whether the policy has been applied completely, consistently, and fairly.

Roles and Responsibilities

The policy must describe the parties involved in the management of participating business (e.g., Board, Appointed Actuary, the PBC or PBA, investment committee), and clearly delineate their respective roles and responsibilities.

Non-Guaranteed Benefits Philosophy and Fairness Across Product Generations

The policy must articulate the overall philosophy in setting non-guaranteed policy benefits, including the sharing of surplus/profits or experience, smoothing and guarantees.

The policy must maintain the principle of fairness between different products and generations, and set out the approach to sharing surplus/profits or experience, including the items to be shared and their quantification.

Asset Pool Valuation and Smoothing

The methodology used to define the scope and derive the value of the underlying pool of assets for the purpose of dividends/bonuses determination must be specified, as well as the methodology for smoothing payouts, with quantitative justification of various criteria including whether it operates fairly for all policy holders, or results in any undue or material cross-subsidization among different dividend/bonus classes.

Allocation of Distributable Surplus/Profits and Expenses and Charges

The policy must set out documentation requirements relating to the allocation of distributable surplus/profits, including the basis and justification for allocating between policy holders and shareholders and among different groups of policy holders.

The policy must also include documentation requirements including, but not limited to, justification for more complex charges such as charges for guarantees or capital; justification as to whether a charge is incurred for operating an applicable participating fund or should be considered as profit in nature; and the basis and justification for allocating expenses and charges to an applicable participating fund, as well as among the sub-funds or cohorts within an applicable participating fund.

Risk Appetite and New Business Strategy

The policy must define the insurer’s risk appetite and considerations when writing new business into the relevant participating funds, including whether there will be any material adverse impact on existing policy holders' interests, how new business strains will be supported and whether new business strains will unduly impact the sustainability of the applicable participating fund on the authorized insurer.

Capital Support and Physical Segregation of Assets

The policy must document requirements for capital support, including any terms and conditions governing its use and withdrawal.

The policy must include requirements for the physical segregation of assets, maintaining separate custodian/bank accounts, and procedures for the settlement of interfund balances.

Communications with Existing and Potential Policy Holders

The policy must establish clear principles for communication with policy holders, including the principles and practices applied in determining the projected non-guaranteed benefits of a standard benefit illustration at the point of sale and in in-force re-projection illustrations, potentially including additional information regarding the profit sharing ratio between shareholders and the participating policy holders; measures to manage the potential conflict between the authorized insurer’s duty to policy holders and its duty to shareholders, particularly in relation to the declaration of dividends/bonuses for policy holders; and the authorized insurer should provide information about the principles and practices, either in the product brochure or in a separate leaflet provided to customers at the point of sale, or on its website (with a link to the website address included in the product brochure).

 

Conclusion and Way Forward

The revised Guideline GL34 heralds a new era of governance, transparency, and fairness in the management of participating business funds. The Insurance Authority’s enhanced standards require not merely procedural compliance, but a demonstrable commitment to the equitable treatment of policy holders and the prudent stewardship of participating funds. Insurers are now called upon to elevate their standards of documentation, oversight, and disclosure, ensuring that every aspect of participating business fund management is underpinned by fairness, sustainability, and sound regulatory practice.

Insurers should undertake a thorough review of their governance frameworks, policies, and disclosures to ensure full alignment with the revised GL34. Early engagement with Board members, the Appointed Actuary, and the PBC will be essential to facilitate a smooth transition and to meet the Insurance Authority’s explicit, wide ranging and enhanced regulatory expectations for transparency and fairness.