Reforming the Insurance System for Traffic Accident Compensation: The Pros and Cons of First-Party Insurance

In early 2025, the Hong Kong Federation of Insurers (HKFI) confirmed that the number of uninsured or untraced drivers involved in road traffic accidents had risen to an estimated 14% of all reported collisions, up from 9% in 2019. This figure, drawn from the HKFI’s Motor Insurance Bureau (MIB) annual report for 2024, represents approximately 2,100 incidents per year where victims cannot recover damages from a liable driver. The existing third-party insurance framework, governed by the Motor Vehicles Insurance (Third Party Risks) Ordinance (Cap. 272), requires every vehicle owner to hold a policy covering liability to third parties. That system leaves a structural gap: when the at-fault driver has no insurance or absconds, the victim must claim from the MIB’s limited fund, which caps payouts at HK$150,000 for property damage and imposes strict time limits. A growing number of legal practitioners, legislators, and consumer advocates now argue that a first-party insurance model — where each road user insures themselves and their own vehicle — would close this gap. The Transport and Logistics Bureau has indicated it will publish a consultation paper on first-party insurance reform in Q3 2025. This article examines the mechanics, advantages, and drawbacks of such a shift.

The Mechanics of First-Party Insurance in the Hong Kong Context

How First-Party Insurance Differs from the Current Third-Party Model

The current system, under Cap. 272, mandates that every motor vehicle owner take out a policy indemnifying the owner against liability to third parties for death, bodily injury, or property damage. The policyholder does not insure their own loss. In a first-party model, each road user — whether driver, cyclist, or pedestrian — would purchase a personal accident and property policy covering their own injuries and vehicle damage. The at-fault driver’s insurer would not pay the victim directly. Instead, the victim’s own insurer pays out, and the insurers settle liability between themselves through a centralised contribution pool.

Section 4 of Cap. 272 currently requires a minimum cover of HK$100 million for bodily injury. A first-party regime would shift the obligation from the vehicle owner to the individual. The legislation provides that the Secretary for Transport and Logistics may, by regulation, prescribe alternative insurance arrangements. That provision has never been used. The 2025 consultation paper is expected to propose a pilot scheme for first-party insurance on a voluntary basis for private cars, with mandatory adoption for commercial vehicles phased in from 2027.

The Central Contribution Pool and the Expanded MIB Role

Under a first-party system, the Motor Insurance Bureau would transform from a residual compensation body into a central clearing house. Each insurer would contribute to a pool based on market share. When a claim arises, the victim’s insurer pays immediately and then recovers from the pool. The pool allocates the cost to the insurer of the at-fault driver — or, if that driver is uninsured, to a collective fund.

The HKFI’s 2024 technical paper on first-party insurance estimates that a central pool would reduce administrative costs by 12–15% because insurers would no longer litigate fault on every claim. The paper cites the Australian experience in New South Wales, where a first-party scheme (the Compulsory Third Party Green Slip system) was partially replaced by a personal injury benefit model in 2022. The NSW model reduced average claim processing time from 14 months to 5 months. Hong Kong’s current third-party claim process, according to the Judiciary’s 2023 annual report, averages 18 months from writ to trial in the District Court.

The Advantages of First-Party Insurance for Traffic Accident Victims

Faster Compensation and Reduced Litigation

The court procedure for a third-party claim requires the victim to prove fault. That means filing a writ in the District Court (for claims under HK$3 million) or the Court of First Instance (for claims above that threshold), serving the statement of claim, and often waiting for the defendant’s insurer to investigate before any offer is made. A first-party model eliminates the fault element for the victim’s own claim. The victim’s insurer pays medical expenses, lost income, and vehicle repair costs upon proof of the accident — not proof of the other driver’s negligence.

The District Court Ordinance (Cap. 336) sets the limit for personal injury actions at HK$3 million. Claims above that go to the Court of First Instance under Cap. 4. In either forum, the victim bears the burden of proving the other driver’s breach of duty. The Transport and Logistics Bureau’s internal impact assessment, leaked to the South China Morning Post in January 2025, projects that a first-party system would reduce the number of contested personal injury claims in the District Court by 30–40%, freeing judicial resources for other matters.

Full Coverage for Uninsured and Untraced Drivers

The MIB currently compensates victims of uninsured or untraced drivers, but the scheme has limits. Under the MIB Agreement of 2023, the maximum payout for property damage is HK$150,000. Bodily injury claims are uncapped, but the MIB can deduct 25% if the victim failed to report the accident within 14 days. A first-party system removes these restrictions. Each road user’s own policy covers their losses regardless of the other driver’s insurance status.

The 2024 MIB annual report records that 1,847 claims were made against the Bureau for uninsured driver incidents, with an average payout of HK$87,000 for bodily injury and HK$12,000 for property damage. Those figures represent only 12% of the estimated actual losses, because many victims do not know they can claim or cannot afford the legal costs to pursue a claim. A first-party system would automatically trigger coverage upon the victim’s own notification to their insurer.

The Disadvantages and Implementation Challenges

Increased Premium Costs for Low-Risk Drivers

The primary objection from consumer groups is that a first-party system shifts the cost burden from the at-fault driver to every road user. Under the current model, only the driver who causes an accident pays — through increased premiums or excess. Under a first-party model, every policyholder pays a premium that covers their own risk, plus a contribution to the central pool for uninsured drivers.

The HKFI’s 2024 actuarial study projects that a mandatory first-party scheme would increase average private car insurance premiums by 18–22%. For drivers with clean records, the increase would be approximately 15%, while high-risk drivers would see a reduction of 10–12% because their risk is spread across the pool. The Consumer Council, in its 2023 submission to the Legislative Council, argued that this cross-subsidy is regressive — low-income drivers who cannot afford higher premiums would be priced off the road.

Moral Hazard and Reduced Incentive for Safe Driving

The legislation provides that third-party insurance premiums are risk-rated based on the driver’s claims history, vehicle type, and age. Insurers can refuse renewal or impose high excesses on drivers with multiple at-fault claims. A first-party system weakens this deterrent. If every driver is insured for their own losses, the financial consequence of causing an accident is shifted to the pool. The at-fault driver’s own insurer may still increase their premium, but the victim’s full recovery is guaranteed regardless of the at-fault driver’s conduct.

The Road Traffic Ordinance (Cap. 374) already provides for demerit points and driving disqualification. The Transport Department’s 2024 statistics show that 23,000 drivers accumulated 10 or more demerit points in 2023, leading to 4,200 disqualifications. Proponents of first-party insurance argue that these criminal penalties, not insurance premiums, are the primary deterrent. Opponents counter that the current system ties financial consequences directly to fault, and removing that link would increase accident rates.

Cross-Border Complications with the Mainland and Macau

Hong Kong operates a closed insurance market for motor vehicles. Vehicles registered in Hong Kong cannot cross the boundary into Mainland China without a separate Mainland insurance policy. The Guangdong-Hong Kong-Macao Greater Bay Area cross-border insurance pilot, launched in 2023, allows Hong Kong insurers to issue policies covering vehicles travelling to Guangdong province. A first-party system would need to align with Mainland China’s compulsory third-party regime, which is fault-based.

The Insurance Authority’s 2024 consultation on cross-border motor insurance noted that a first-party model in Hong Kong would create a mismatch. A Hong Kong driver insured under a first-party policy who causes an accident in Shenzhen would face a claim under Mainland third-party rules. The victim in Shenzhen would have no first-party coverage from a Hong Kong insurer. The Insurance Authority has proposed a bilateral agreement where each jurisdiction recognises the other’s insurance model for accident victims, but no binding agreement has been signed as of mid-2025.

The Legislative and Regulatory Pathway

The 2025 Consultation Paper and Potential Timelines

The Transport and Logistics Bureau has confirmed that the consultation paper on first-party insurance reform will be published in Q3 2025. The paper is expected to propose three options: (1) a voluntary first-party scheme for private cars, (2) a mandatory first-party scheme for all vehicles, and (3) a hybrid model where third-party insurance remains mandatory but first-party coverage is encouraged through tax deductions.

The Legislative Council Panel on Transport will hold public hearings in Q4 2025. The timeline for any legislative amendment to Cap. 272 would require at least 18 months — a bill gazetted in mid-2026, passed by the Legislative Council in early 2027, and implemented by mid-2028. The Transport and Logistics Bureau has indicated it will prioritise the hybrid model to avoid disrupting the existing insurance market.

The Role of the Insurance Authority and the HKFI

The Insurance Authority (IA) will be responsible for approving any new insurance product classes under a first-party regime. The IA’s Guideline on Motor Insurance (GL-12) currently requires all motor policies to meet minimum third-party coverage standards. The IA has stated in its 2024–2025 business plan that it will issue a new guideline on first-party motor insurance if the consultation supports it.

The HKFI has formed a working group on first-party insurance, chaired by the CEO of a major general insurer. The working group’s interim report, published in March 2025, recommends a phased implementation: voluntary for private cars from 2027, mandatory for taxis and public light buses from 2028, and mandatory for all commercial vehicles from 2029. The report also recommends a maximum premium increase cap of 10% per year for the first three years.

Actionable Takeaways

• If you are involved in a traffic accident in Hong Kong, the current procedure under Cap. 272 requires you to report the accident to the police within 24 hours and to notify your own insurer within 14 days — failure to do so may reduce your MIB claim by 25%.
• The 2025 consultation paper will be published on the Transport and Logistics Bureau website; submit your written views before the deadline to influence the reform direction.
• Consider purchasing a personal accident policy with a motor extension — this is not first-party insurance but provides immediate cover for medical expenses while a third-party claim proceeds.
• If you are a commercial vehicle operator, monitor the HKFI working group’s recommendations on phased implementation, as mandatory first-party insurance for your vehicle class may begin as early as 2028.
• Cross-border drivers should maintain both a Hong Kong third-party policy and a Mainland compulsory policy — the proposed first-party reform does not affect cross-border liability until a bilateral agreement is signed.

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