HKIA warns of risks in premiums financing, “double-edged sword”

The authority urges insurers to seek professional advice before premium financing.

Hong Kong’s Insurance Authority (IA) cautioned that premium financing, whilst offering potential benefits, carries inherent risks, particularly in periods of rising interest rates. 

“In the past era of low-interest rates, through premium financing, policyholders may benefit from the spread between their policy returns and bank loans while also amplifying their returns through leveraging. However, this would in turn magnify the risks and potential losses,” Marty Lui, head of Long Term Business (Acting) of the IA said in an announcement.

“The current high-interest rates have already increased the cost of borrowing, and at the same time possibly decreased the policy returns as the majority of products purchased through premium financing in the market are now participating products, which not only offer non-guaranteed returns that are subject to the investment performance of the insurers but also have a longer break-even period, further aggravating the risks involved in premium financing,” Lui added.

The IA, in collaboration with the Hong Kong Monetary Authority (HKMA), introduced new supervisory guidelines in 2023 to enhance transparency and affordability assessments in premium financing transactions. 

These measures aim to safeguard the interests of policyholders amidst evolving market conditions.

Recent data indicates a significant slowdown in premium financing activities in 2023, reflecting a more cautious approach among stakeholders amidst interest rate hikes. Nonetheless, challenges persist, with complaints regarding inadequate risk disclosure and misrepresentation of information remaining prevalent.

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To address these concerns, the IA emphasises the importance of informed decision-making both before and after purchasing a premium financing policy. Before acquisition, policyholders are urged to fully comprehend the associated risks and undergo a comprehensive affordability assessment facilitated by insurance intermediaries.

Furthermore, ongoing review and prudent financial management post-purchase are essential to mitigate risks and avoid premature policy surrender, which can result in substantial losses for policyholders.

“Life policies are often long-term in nature, and early surrender will result in a loss. Policyholders should be mindful that purchasing long-term policies using premium financing will magnify such losses due to the leverage effect. In one case from our recent inspection, the policyholder, fearing a further interest rate hike, decided to surrender his policy only several months after he purchased it,” Lui stated.

“Most of the policy surrender value was used to repay the loan, so the policyholder could recover only HK$400 in the end, resulting in a net loss of HK$300,000 of the principal. Considering other expenses related to the loan, he suffered a loss of over 100%. In addition to the monetary loss, policyholders will lose their insurance protection after surrendering their policy, and they may not be able to obtain the same insurance coverage later for reasons such as a change in health condition.” said Lui.

The IA underscores the need for policyholders to exercise caution and seek professional advice when navigating the complexities of premium financing.