Premium financing (PF) is a financing arrangement whereby a customer takes out a loan to pay the premium for an insurance policy. PF is often used by customers to take out life insurance, with the insurance policy used as collateral (i.e. security) for the loan.
The Hong Kong Insurance Authority (HKIA) and the Hong Kong Monetary Authority (HKMA) carried out a joint inspection on insurers and insurance intermediaries (including banks) on the use of PF to take out long term insurance in Hong Kong.
Key findings of the joint inspection were announced on 30 September 2021 and can be accessed here. The key findings included the following:
Customers’ Affordability
- PF is in substance a loan and customers need to make loan repayments with interest. The affordability assessment should therefore take into account the PF loan, but does not always do so. Some insurers and intermediaries would conduct affordability assessment based on the premium amount borne by the customer (which is not funded by the PF), which would allow the customer to use PF to purchase policies above his/her affordability. This is a concern because if the lender requests early repayment of the PF loan in full, the customer would not have sufficient liquid assets – and the lender may surrender the policy to the customer’s detriment.
- Insurers and insurance intermediaries do not check whether existing policies of customers are subject to PF loans. The customer’s repayment obligations for outstanding PF loans over existing policies will affect his/her affordability to purchase any new policies and should therefore be taken into account in the affordability assessment.
- It was found that despite declaring having sufficient liquid assets, some customers failed to provide proof of assets or source of funds, or provided proof which did not match the exact information. Some insurers also found that customers had undisclosed liabilities, such as loans and overdrafts, but simply omitted these in the affordability assessment.
Risk Disclosure
- Risk disclosure practice and level of disclosures vary substantially amongst insurers and intermediaries. While the majority of insurers required or expected intermediaries to explain the insurers’ risk disclosure form to customers, there was no requirement for intermediaries to sign-off showing that they had complied with such procedures.
- Some insurers did not adequately disclose certain key terms/risks to customers – such as the definition of PF and that PF is not part of the insurance policy contract; that customers may be subject to various risks resulting from use of PF (e.g., exchange rate risk, credit risk, early surrender risk, etc); and the impact on the customer’s rights to cancel the policy within a cooling-off period. Similar issues were noted with some banks acting as insurance intermediaries, not adequately explaining the risks, features and limitations of PF to customers.
Other Practices
- Certain inappropriate sales practices were found, such as an agent bundling the PF arrangement with the insurance policy, as if this was a banking product. A few intermediaries also recommended a particular product because it was eligible for PF and would “enhance” the return for the customer.
- Intermediaries did not fully take into account the actual impact of PF facilities. For instance, the actual benefit received by a customer might be less than the target advised by the insurance intermediary, as the benefit would be offset by repayment of the PF. The shortfall could be significant but customers may not fully understand the impact of the PF if this shortfall is not highlighted to them.
- Deficiencies were also found in processing the assignment of policies, including: customer’s signature on the Notice of Assignment was significantly different from signatures in the policy documents; and the Notice of Assignment lacked key policy information but was still processed by the insurer.
- The right to cooling-off was often assigned to the lender prior to policy issuance, but insurers did not update the cooling-off notice. It was also found that some banks acting as insurance intermediaries failed to inform customers that interest would be charged on the PF loan even if the customer exercised cooling-off rights.
In summary, the joint inspection did indeed find some areas of concern and the use of PF was not always fully considered. The HKIA and HKMA will be engaging the industry to clarify expected standards for insurers and insurance intermediaries when carrying out insurance activities involving PF.
Insurers, insurance intermediaries and PF lenders therefore need to closely monitor this area – as there will likely be further regulatory development which will affect current practices involving the use of PF.
