Hong Kong Insurance Authority: Premium financing business has become active again; a third joint inspection has been conducted with the Hong Kong Monetary Authority

On November 5, Mr. Lui Yu-Kwok, Executive Director (Long Term Business) of the Hong Kong Insurance Authority, and Mr. Ng Wai-Kuen, Head (Acting) of the Conduct Supervision Division, noted in an article that recently, persistently high US dollar interest rates alongside declining Hong Kong dollar rates have created an interest rate spread, and premium financing business has once again become active. In response to this trend, the Hong Kong Insurance Authority, together with the Hong Kong Monetary Authority (HKMA), launched a new round of premium financing inspections in the second half of this year, and will study appropriate regulatory measures with the HKMA based on the inspection results. The article noted that fluctuations in premium financing business are closely tied to market borrowing rates. Over the past few years, dramatic swings in the interest rate environment have caused premium financing to surge and plunge. In 2024, when interest rates were high, premium financing business fell sharply, accounting for approximately 12% of new business premiums that year. In the first half of 2026, falling Hong Kong dollar rates drove up demand for premium financing, and this proportion rose significantly to 36%. Behind the business growth, the Hong Kong Insurance Authority observed three phenomena worthy of attention. The first is the use of foreign currencies as loan currencies. The market has recently begun to see arrangements in which overseas banks provide other low-interest currencies (such as the Swiss franc) as the loan currency. The interest rates and exchange rates of these low-interest currencies can be extremely volatile. If policyholders are unfamiliar with the interest rate and exchange rate trends of the relevant currencies and the various factors affecting their changes, they may face sharply rising debt servicing costs due to interest rate or exchange rate fluctuations, potentially resulting in substantial losses. In addition, when loans are provided by overseas banks, the loan contracts are governed by overseas laws, and the conduct of the banks concerned is supervised by local regulators. In the event of loan disputes or controversies, policyholders may not be able to seek assistance in Hong Kong, and the difficulty and cost of cross-border complaints or litigation may be very high. The second is the retailization of premium financing. Leveraged borrowing is a high-risk financial arrangement generally suitable only for high-net-worth individuals with sufficient liquid assets, stable and ample income sources, and a high risk tolerance, and is not suitable for the general public or retail customers who do not meet these conditions. However, recently the Hong Kong Insurance Authority has noticed signs that certain insurers are attracting more middle-class individuals to participate in premium financing by lowering entry thresholds. While reminding insurers to ensure customers have sufficient affordability, the Hong Kong Insurance Authority also reminds policyholders not to develop a false sense of being "high-net-worth" due to premium financing, thereby overestimating their own financial strength and debt repayment capacity and taking on leverage risk beyond their means. The third is the increase in policy leverage multiples. Insurers enhance the attractiveness of insurance products by offering premium discounts and raising day-one cash values; at the same time, banks increase the appeal of loans by raising loan-to-value ratios and waiving loan handling fees. When multiple discounts and incentives are stacked together and used for premium financing, the leverage effect of policies is further amplified. The Authority has noticed that products with leverage multiples exceeding nine times have appeared in the market, where policyholders need only pay 10% of the premium to purchase large-sum policies. Since 2023, the Hong Kong Insurance Authority has required insurers, when conducting affordability assessments, to check whether premium financing customers can fully repay their loans without surrendering their policies in order to address risks. However, high-leverage arrangements for policies amplify illustrated returns, easily enticing customers into a "small stake, big gain" mindset while ignoring the correspondingly amplified risks; once the market environment changes, the financial pressure on customers may increase rapidly, and they may even suffer significant losses. The Hong Kong Insurance Authority calls on the public to fully understand and assess the risks involved before considering premium financing, including fluctuations in non-guaranteed benefits, loan interest rate fluctuations, and exchange rate fluctuations. At the same time, policyholders are not exposed to a single riskthe above risks may occur in combination. Fluctuations in multiple factorspolicy returns, loan interest rates, and exchange ratescan at any time turn an arbitrage opportunity into a negative spread. Therefore, before considering premium financing, policyholders should fully understand the features and risks of the relevant products and carefully assess their own financial situation and risk tolerance.