21 February 2024
The IA has warned insurers of the inherent risks related to premium financing as this is particularly sensitive to changes in interest rates. The surge in interest rates in the past two years has brought severe volatility to the market which has impacted both policyholders and the insurance market.
Mr Marty Lui, the IA’s head of Long Term Business (Acting), highlighted the risks involved in premium financing:
- during periods of low interest rates, policyholders are able to use premium financing to benefit from the spread between their policy returns and bank loans and also amplify their returns through leveraging; however, this magnifies risks and potential losses;
- current high interest rates have already increased the cost of borrowing, and at the same time decreased policy returns as the majority of products purchased through premium financing are now participating products, which offer returns which are not guaranteed and are subject to the investment performance of the insurers and also have longer break-even periods, further aggravating the risks involved in premium financing.
In view of these risks, the IA and the Hong Kong Monetary Authority (HKMA) jointly issued guidance to the industry in 2022 to clarify the supervisory requirements for premium financing. These requirements, which take effect in 2023, are targeted at insurers and insurance intermediaries and focus on enhancing disclosure and improving affordability assessment to protect policy holder interests.
In 2022, the IA received 28 complaints about premium financing, and that figure rose to 50 in 2023. Concerns were raised over the lack of risk disclosure by intermediaries during the selling process and misrepresentation of policy terms and loan rates.
In 2023, premium financing activities will slow down substantially; this business declined from 43% of the total market in 2022 to 21% in 2023 (including a multi-year record low of 9% in Q4 of 2023). This may indicate that amid rate increases the public has become relatively conservative towards premium financing.
The IA and the HKMA have joined forces for another round of inspections related to premium financing to examine compliance with the new requirements and assess market trends. They will share their observations from these inspections with the industry in due course and in the interim, and to enhance policyholder protection, have issued a reminder about the cautious use of premium financing.
Link to IA article
Link to Business Insurance article
Link to Asia Insurance Review article