Hong Kong Insurance Regulatory Authority: The premium financing business has once again become active, and the third joint inspection with the Hong Kong Monetary Authority has been carried out

The Zhitong Finance App learned that on November 5, Mr. Lu Yuguo, Executive Director (long-term business) of the Hong Kong Insurance Regulatory Authority and Mr. Wu Weiquan, Head of the Conduct Supervision Department (Acting), wrote an article stating that in recent times, interest rates on the US dollar have continued to rise while interest rates on the Hong Kong dollar have declined, leaving room for interest spreads, and the premium financing business has once again become active. In response to this trend, the Hong Kong Insurance Regulatory Authority and the Hong Kong Monetary Authority (HKMA) have launched a new round of premium financing inspections in the second half of this year, and will study appropriate regulatory measures with the Hong Kong Monetary Authority based on the findings of the investigation.

The article points out that the ups and downs in the premium financing business are closely related to market borrowing interest rates. Over the past few years, drastic fluctuations in the interest rate environment have brought about major ups and downs in premium financing. When interest rates were high in 2024, the premium financing business declined sharply, accounting for about 12% of premiums for new construction businesses in that year. Meanwhile, in the first half of 2026, the fall in interest rates on the Hong Kong dollar led to an increase in demand for premium financing services, and the proportion of this business rose significantly to 36%.

Behind the growth in business, the Hong Kong Insurance Regulatory Authority has observed three noteworthy phenomena. The first is to use foreign currency as the loan currency. The market has recently begun to see arrangements for overseas banks to provide other low-interest currencies (such as the Swiss franc) as loan currency. Interest rates and exchange rates of these low-interest currencies can be extremely volatile. If the policyholder is unfamiliar with the interest rate and exchange rate trends of the relevant currencies and the factors affecting their changes, there is a chance that debt repayment costs will rise sharply due to interest rate or exchange rate fluctuations, and eventually cause large losses. Furthermore, when loans are provided by overseas banks, the loan agreement is governed by foreign laws, and the actions of the banks concerned are also supervised by local regulators. In the event of a loan dispute or dispute, policyholders may not be able to seek assistance in Hong Kong, and cross-border complaints or litigation can be very difficult and costly.

The second is the retailing of premium financing. Leveraged lending is a high-risk financial arrangement. It is generally only suitable for high-net-worth individuals with sufficient liquid assets, stable and abundant income sources, and high risk tolerance. It is not suitable for ordinary people or retail customers who do not have the above conditions. Recently, however, the Hong Kong Insurance Regulatory Authority has noticed signs that some insurance companies are attracting more middle class participants to participate in premium financing by lowering entry barriers. While reminding insurance companies to ensure that customers have sufficient affordability, the Hong Kong Insurance Regulatory Authority also reminds policyholders not to create the illusion of “high net worth” due to premium financing, thereby overestimating their financial strength and ability to pay debts, and assume leverage risks beyond their own ability.

The third is the increase in the policy leverage ratio. Insurance companies increase the attractiveness of insurance products through measures such as providing premium discounts and increasing first-day cash value; at the same time, banks also increase loan attractiveness by increasing loan factors and exempting loan processing fees. When multiple discounts are combined and used for premium financing, the leveraging effect of the insurance policy will be further amplified. The bureau has noticed that products with a leverage ratio of more than nine times have appeared on the market. The policyholder only needs to pay 10% of the premium to purchase a large insurance policy.

Since 2023, the Hong Kong Insurance Regulatory Authority has required insurance companies to conduct affordability assessments to check whether premium financing customers can fully repay their loans without surrendering their insurance to deal with risks. However, the high leverage arrangement of insurance policies will amplify demonstration returns, and can easily attract customers to develop a “small and big” mentality and ignore the risk of simultaneous expansion; once the market environment changes, the financial pressure on customers may increase rapidly, and they may even have to suffer major losses.

The Hong Kong Insurance Regulatory Authority urges the public to fully understand and assess the risks involved, including unguaranteed interest fluctuations, loan interest rate fluctuations and exchange rate fluctuations before considering the use of premium financing. At the same time, the policyholder does not bear a single risk; the above risks may occur in combination. Multi-factor fluctuations in policy returns, loan interest rates, and exchange rates can turn the arbitrage space into negative spreads at any time. Therefore, before considering the use of premium financing, policyholders should fully understand the characteristics and risks of the relevant products, and carefully evaluate their financial situation and risk tolerance.