Premium Financing for Long Term Insurance – Understanding Hong Kong’s Regulatory Landscape

Premium financing is a popular way to fund the purchase of long term insurance, particularly in the Hong Kong insurance industry. On 1 April 2022, the Insurance Authority (IA) issued a circular clarifying the supervisory standards and key requirements on use of premium financing to take out long term insurance policies, which will come into effect on 1 January 2023. We also refer to our previous Legal Update on the “Key Findings of Joint Inspection by Hong Kong Regulators on Using Premium Financing for Purchasing Long Term Insurance”.

Affordability Assessment 

• The insurance intermediary must take into account premium financing in assessing the customer’s affordability as required by paragraph 6.11 of GL30 Guideline on Financial Needs Analysis. This means, at the minimum, considering whether the customer has sufficient financial resources to pay any premium, meet scheduled repayments and repay the premium financing loan if required before policy maturity. 
• If the customer refuses to provide this information, the insurance intermediary should explain to the customer that in the absence of such information, it is unable to assess the customer’s suitability and affordability and will need to obtain an acknowledgement from the customer. 
• The insurer must have internal controls for checking whether any ‘in force’ policies of the customer have been assigned or pledged. The Financial Needs Analysis should explicitly ask whether the customer has any insurance policies assigned as collateral for premium financing loans. 
• Insurance intermediaries should not advise customers to use premium financing without obtaining sufficient information about the customer’s circumstances and details of the proposed premium financing loan.

Over-leveraging Risks 

• Risk of over-leveraging refers to the risk of customer not being able to repay the premium financing loan before policy maturity and customer is required to use the surrender value of the policy. Insurance intermediaries must not recommend a policy if there is an over-leveraging risk unless there is sufficient justification, which must be explained to the customer. 
• Insurers’ underwriting process should guard against the risk of over-leveraging and should verify customers’ assets and income; and whether there are any undisclosed liabilities. Insurers should take into account condition of customers’ assets and reduce value where appropriate (e.g., if customer owns property 50/50 with another, value should be reduced by 50 percent). 

Disclosure

• For every new insurance application where the customer intends to use premium financing, the customer will need to complete an Important Facts Statement – Premium Financing (IFS-PF) which is annexed to the Circular. It will be the responsibility of the insurance intermediary to explain the IFS-PF to the customer. As the IFS-PF is not exhaustive, the insurance intermediary should also explain any other relevant terms and conditions, risks and features involved in premium financing. 

Sales Practice, Training and Other Aspects 

• Insurers should provide adequate training to insurance intermediaries to ensure they have a good understanding of the nature and risks associated with premium financing. The training materials should be well balanced and should not emphasize the leveraging benefits of premium financing. 
• Insurers and insurance intermediaries must treat customers fairly and provide accurate and adequate information to customers. They should explain how premium financing may impact the customer’s cooling-off rights and where appropriate, the cooling-off notice should be updated. 

Given premium financing is a common and popular way of funding long term insurance, it is important for insurers and insurance intermediaries to understand the supervisory approach and new regulatory requirements. 

They will need to carefully take into account premium financing in assessing suitability and affordability.

Insurance intermediaries will also need to clearly explain the risks and features of premium financing and the IFS-PF. The IA will take into account compliance with the standards and requirements in determining the fitness and properness of directors, controllers and key persons of insurers and insurance intermediaries.