Author
Bowtie Team
Updated on
2025-05-29
Disclaimer: This article is translated with the assistance of AI.
Have you ever thought about what would happen if your insurance company went bankrupt? How stable are insurance companies, and what protections exist to safeguard your investment? In this guide, we’ll explain how policyholder protections work, and offer tips to help you choose a reliable insurer.
Is It Possible For Insurance Companies To Go Bankrupt?
Insurance companies are business entities, and theoretically, they could go bankrupt if they cannot cover their expenses. If an insurance company goes bankrupt, the policyholders’ coverage might also disappear. In reality, the chances of an insurance company going bankrupt are very low, for two main reasons.
1. Accurate Risk Calculation
First, let’s discuss the nature of insurance companies’ business and operations. Some people think whether you get coverage from an insurance depends on luck, but that’s not accurate. In fact, insurance companies use probability calculations to spread the risk of a few individuals across a large group of people.
Moreover, to accurately calculate their underwriting capacity and risks, insurance companies employ professional actuaries. They factor in variables and assumptions from real situations, such as expected lifespans, disease occurrence rates, and future interest rate trends, into their risk assessments. As a result, we rarely see cases where insurance companies go bankrupt due to unmanageable risks.
The concept of probability is that, the larger the sample size, the closer the actual probability gets to the theoretical one. For example, according to the Census and Statistics Department’s 2018 data, the mortality rate for men aged 30 to 34 is 0.5%, meaning on average, 1 out of every 2,000 people dies. However, in a real group of 2,000 people, more than one person might die, making the actual rate higher than 0.5%. But if the sample size increases to 20,000 or even 200,000 people, the actual death rate will be closer to 0.5%. Therefore, the more policyholders an insurance company has, the more accurate the actuaries’ calculations become, and the lower the excessive risk, making the company more stable.
Additionally, under regulations from the Insurance Authority, insurance companies must maintain sufficient reserves to cover claims, so the likelihood of them going bankrupt due to excessive payouts is extremely low.
2. Reinsurance Arrangements
So, could there be sudden events that increase risks beyond expectations? The COVID-19 pandemic is a prime example, as it could lead to a higher likelihood of policyholders making claims. In such cases, insurance companies can use reinsurance to transfer some of the risk to reinsurers. This way, if a major event requires large payouts, the reinsurer will share part of the compensation responsibility.
Cases of Insurance Company Bankruptcies and Impact on Policyholders
In reality, there are very few cases of Hong Kong insurance companies going bankrupt, and no life insurance company has ever failed.
In 2009, there was an incident where the Insurance Authority took over Stellar Insurance. However, Stellar Insurance primarily handled general insurance like auto insurance, not life, critical illness, or medical insurance. Its business only accounted for 0.5% of Hong Kong’s general insurance market, so the impact on the public was minimal.
Occasionally, we see news of insurance companies being sold or acquired, such as MassMutual selling its Hong Kong and Macau operations to Fung Financial in 2018, or New World Group acquiring FTLife in 2019. These are purely commercial decisions and not due to operational issues. Even if the parent company changes, the policies remain protected under their original terms, so policyholders’ rights are unaffected.
A more notable event was during the 2008 financial crisis when AIG sold its subsidiary AIA. It’s important to note that AIG’s troubles stemmed from issuing large amounts of credit default swaps and other structured products, leading to massive losses from the subprime mortgage crisis, not from its insurance business. From another perspective, the stability of its insurance operations allowed AIG to sell valuable assets to raise funds.
Insurance Regulation and Protection for Policyholders
On the other hand, the Hong Kong government imposes strict regulations on insurance companies, including adequate capital, solvency margins, suitable management and shareholders, and sufficient reinsurance arrangements. The goal is to ensure that authorized insurance companies can fulfill their commitments to policyholders.
1. Adequate Capital and Solvency Margins
The minimum capital requirement for operating general and long-term insurance business is HK$20 million * , but this is just the minimum; companies must maintain a higher appropriate safety level.
Adequate solvency margins ensures that an insurance company’s assets are sufficient to cover its liabilities and provide reasonable protection for policyholders. Companies must keep the amount by which their assets exceed liabilities at least at the level specified in the regulations, typically a solvency ratio of at least 150%, which means assets should be at least 1.5 times liabilities. However, most insurance companies maintain ratios above 200%.
2. Suitable Management and Shareholders
The Insurance Ordinance has high requirements on anyone appointed as a director or controller of an insurance company. Insurance companies must obtain prior approval from the Insurance Authority before appointing certain controllers, including the chief executive. In conducting the fit and proper test, the Insurance Authority considers factors such as the applicant’s character, experience, and background as a company director or controller.
3. Sufficient Reinsurance Arrangements
According to the Insurance Authority’s regulations, insurance companies must have adequate reinsurance arrangements for their insurance business.
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