The Secretary for Financial Services and the Treasury, Professor K C Chan, said: "The PPF will be a safety net for policyholders when an insurer becomes insolvent. It will enhance the stability and competitiveness of Hong Kong’s insurance industry."

"We are pleased to note that there is support from the general public and industry for the establishment of a PPF and most of the key elements of the consultation proposals," he added. "Taking into account the comments received, we have developed the final proposals. On that basis, we will proceed with preparing the enabling legislation."

The PPF will comprise a Life Scheme and a Non-Life Scheme, which will be independently operated and will focus on individual policyholders. However, the government also proposes that the PPF will cover small and medium enterprises (SMEs), recognizing that they have less resources to assess the financial ability of insurers and are less capable of protecting their interests.

"A simple definition for SME known to the market will be adopted, and we will also keep the administrative procedures user-friendly to minimize the administrative cost," Professor Chan disclosed, addressing concerns about the administrative cost implications arising from the need for insurers to verify the SME status of policyholders.

All authorized direct life and non-life insurers will be required to participate in the PPF. Considering views from the industry respondents, the PPF Board will be empowered to consider and approve applications for exemption from the PPF by insurers, if they are able to demonstrate that they offer equivalent protection to their policyholders in Hong Kong via an overseas compensation scheme of similar nature.

The government is also prepared to consider proposals from the industry on excluding premiums attributable to policies not covered by the PPF from levy calculation, provided that there is an effective way to assess and verify the amount.

The government will maintain the consultation proposal of having a compensation limit of HKD1m (USD129,000). It is felt that any increase in the proposed compensation limit would lead to a significant surge in the levy rates without contributing to a proportionate enhancement in protection.

Any compensation will be 100% for the first HKD100,000 of any claim, plus 80% of the balance, up to the compensation limit. The proposed compensation limit will be able to meet nearly all of the claims arising from some 90% of life policies, and will meet fully the claims of some 96% of non-life policies.

When an insurer becomes insolvent, the PPF will facilitate the transfer of life policies and accident and health policies with guaranteed renewability to a replacement insurer. For non-life policies, the PPF will provide for continuity of coverage until their expiry.

The PPF will also adopt a progressive funding model which will charge a moderate initial levy complemented by a "stepped-up" levy when an insurer becomes insolvent. The initial target fund size will be HKD1.2bn for the Life Scheme and HKD75m for the Non-Life Scheme, planned to be achieved within 15 years. The initial levy rates of the PPF will be 0.07% of the applicable premiums for both schemes.

The levy will be collected from insurers, and will be reviewed regularly together with the target fund size based on actual data after implementation of the PPF.

"We will continue to engage the stakeholders in the process of preparing the enabling legislation for establishing the PPF," Professor Chan said. "We aim to introduce the bill into LegCo in the 2012-13 legislative session, for setting up the PPF in 2013-14 at the earliest."