Hong Kong regulator warns on premium financing risks, joint probe with central bank
Hong Kong's Insurance Authority flagged rising premium financing retailisation, increased policy leverage and foreign-currency loans. It is conducting a third joint probe with the Hong Kong Monetary Authority to study appropriate regulatory measures.
Hong Kong’s Insurance Authority (IA) has warned about the retailisation of premium financing, rising policy leverage ratios, and the use of foreign currencies as loan currencies. The IA said it is conducting a third joint inspection on premium financing with the Hong Kong Monetary Authority (HKMA) and will, based on the findings, jointly study appropriate regulatory measures.
The IA noted that the decline in Hong Kong dollar interest rates in the first half of this year pushed the proportion of premium financing business to 36 per cent. It cautioned that interest rates and exchange rates for low-interest currencies can be highly volatile. When loans are provided by overseas banks, the loan contracts and those banks are governed by foreign laws and overseas regulators, the IA said. In the event of disputes, policyholders may not be able to seek assistance in Hong Kong, and the difficulty and cost of cross-border complaints or litigation will increase.
The regulator also observed that some insurers have lowered entry thresholds to attract more middle-income individuals to participate in premium financing. The IA reminded the industry to ensure customers have sufficient affordability. It also warned policyholders not to develop a false sense of “high net worth” from premium financing, overestimate their financial strength and debt-servicing ability, or take on leverage risks beyond their capacity.
The IA expressed concern over the rise in policy leverage multiples, noting that products with leverage multiples exceeding nine times have appeared on the market. Policyholders need only pay 10 per cent of the premium to purchase a large policy. The IA warned that if market conditions change, customers’ financial pressure could increase rapidly, and they could even suffer significant losses.
The IA reminded the public to fully understand and assess the risks involved before considering premium financing.