22 October 2021
On 30 September 2021, the Insurance Authority (“IA”) and the Hong Kong Monetary Authority (“HKMA”) published a circular on the IA and the HKMA’s joint inspection exercise relating to premium financing of long term insurance policies in Hong Kong (the “Circular”).
Premium financing is an insurance funding arrangement whereby a customer purchases a life insurance policy and finances the payment of the premiums under the policy using a loan facility provided by a lender. The customer assigns the life insurance policy to the lender as a collateral for the loan. In entering into a premium financing arrangement, a customer is exposed to risks associated with the loan facility which may adversely affect the insurance coverage and benefits to be received under the policy.
Key observations of the IA and the HKMA during the joint inspection exercise are summarized below:-
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Customers’ affordability
It was observed that the impact of the use of premium financing on the customer’s ability to afford the life insurance policy was sometimes not adequately taken into consideration as required under the Guideline on Financial Needs Analysis issued by the IA. The IA and HKMA have found that some intermediaries have established a good practice by setting an internal threshold for affordability and would not proceed with an insurance application if the total premium of the proposed policy, together with the total interest payments under the premium financing facility, exceeded a certain percentage of the liquid assets or disposable income of the customer. This avoids the issue of over-leveraging via premium financing.
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Risk disclosure
As premium financing involves customers assigning their rights and benefits under the proposed policy as collateral in order to receive financing from the lender, the IA and HKMA expects the customers to fully understand the relevant risks, limitations and consequences arising from collateral assignment before purchasing a policy through premium financing.
The IA and HKMA gave examples of the key terms and risks of premium financing which should be brought to the customer prior to purchasing such a policy:-
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the definition of “premium financing” and that the premium financing arrangement is not part of the insurance policy contract;
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the customer may be subject to various risks such as exchange rate risk, credit risk and early surrender risk as a result of the use of premium financing arrangement, which may result in financial loss or reduction in benefits;
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the impact on the customer’s rights to cancel the policy within cooling-off period.
For further information, please contact:
Louise Yam, Hauzen LLP
louiseyam@hauzen.hk
