Hong Kong’s Insurance Authority (HKIA) and Monetary Authority (HKMA) have joined forces to look into the use of premium financing to take out long-term insurance policies.
Premium financing is an arrangement where a prospective policyholder borrows money from a financial institution to settle part of the insurance premiums and, as a result, assigns all or part of their rights to the firm as collateral, the two regulators explained.
The HKIA and HKMA’s decision to look into the practice was driven by their rising popularity as wealth and liquidity management tools following a prolonged period of low interest rates.
The joint inspection of insurers and intermediaries took place in the second half of 2020 and was aimed at ensuring people were aware of the risks associated with this type of lending.
Findings
The watchdogs found that the firms inspected were able to comply with the minimum regulatory requirements on risk disclosure, but the “granularity and adequacy of such disclosures” should be improved.
In terms of affordability assessments, the regulators found that sometimes firms did not adequately take into consideration whether a client could afford the life policy. In some instances, the asset proof provided by customers “did not match with the liquid assets disclosed during the financial needs analysis process”.
This means that the HKIA and HKMA had doubts about whether certain clients could actually afford the life policy via premium financing, more specifically, they questioned whether these customers had sufficient financial resources to pay back the loan in full upon request of the lenders.
Some intermediaries fell short of appropriately taking into consideration premium financing and did not provide “accurate and adequate information” to clients to allow them to make informed decisions.
Client interests must be protected
The two regulators will now engage with the industry to clarify what is expected under the regulatory standards for insurers and intermediaries when premium financing is involved.
“Premium financing involves leveraged borrowing and exposure to the risk of interest rate hikes, with low or even negative returns being a distinct possibility when non-guaranteed benefits produced by insurance policies fall short of expectations,” said Clement Cheung, chief executive of the HKIA.
“The interest of policyholders has to be adequately protected.”
Eddie Yue, chief executive of the HKMA, added: “The joint inspection on premium financing activities has demonstrated the collaborative effort and commitment of the MA and the IA to tackle cross-sectoral insurance related issues.
“The two regulators will continue to work closely to monitor market developments and raise industry conduct standards with a view to further enhancing protection of policy holders and bank customers.”
