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Premium financing on the rise: Examining the risks behind “Small Leverage for Big Gains"

5 November 2026
 

In early 2024, amid a persistently high interest rate environment, the Insurance Authority (IA) published an article on premium financing, highlighting the associated risks and key considerations for policy holders before and after entering such arrangements. Recently, with US dollar (USD) interest rates remaining elevated while Hong Kong dollar (HKD) interest rates have declined, an interest spread has emerged, resulting in the resurgence of premium financing activities. In response to this trend, the IA commenced a new round of joint inspections with Hong Kong Monetary Authority (HKMA) on premium financing in the second half of this year. It is therefore timely to revisit this topic, share our latest observations, and once again remind the public to carefully weigh the potential risks before making any related decisions.

The ups and downs of the premium financing market are closely linked to borrowing interest rates. In recent years, interest rate volatilities have resulted in significant fluctuations in premium financing business. When interest rates were high in 2024, premium financing activities declined substantially, accounting for around 12% of new business premiums. However, in the first half of 2026, lower HKD interest rates have stimulated relevant demand, driving this proportion up significantly to 36%.

Behind this business growth, the IA has observed the following trends warranting attention:

1. Use of foreign currency as loan currency

Most policy holders using premium financing take out loans in HKD to purchase USD policies. With the Linked Exchange Rate System pegging the HKD to the USD, the currency mismatch risk is relatively manageable. However, the IA has noted that the market has seen arrangements under which offshore banks offer loans in other low-interest-rate currencies, such as the Swiss franc, for premium financing.

Interest rates and exchange rates for these currencies can be highly volatile. Take the Swiss franc as an example, its interest rates rose by more than 200 basis points within a short period between 2022 and 2023, while the currency appreciated by around 30% against the USD from its lowest to highest level over the past decade. If policy holders are not familiar with the interest rate and exchange rate trends of these currencies as well as the factors driving them, adverse movements in these rates could significantly increase their borrowing costs and lead to substantial losses.

Furthermore, where loans are provided by offshore banks, the loan contracts are governed by foreign laws, while the banks' conduct is regulated by their home authorities. In the event of loan disputes or disagreements, policy holders may not be able to seek assistance in Hong Kong, and pursuing cross-border complaints or legal proceedings can be extremely challenging and costly.

2. Expanding retail participation in premium financing

Leveraged borrowing is a high-risk financial arrangement generally suitable only for high-net-worth (HNW) individuals with sufficient liquid assets, stable and ample income streams, and a high risk tolerance. It is not suitable for the general public or retail customers who do not meet these criteria.

However, the IA has recently observed that some individual insurers appear to be lowering the entry threshold for premium financing to attract middle-class customers. While reminding insurers to ensure that customers have sufficient affordability, the IA would also like to remind policy holders not to be misled by the illusion of becoming "HNW" through premium financing, thereby overestimating their financial strength and debt repayment capacity, and consequently taking on leveraged risks beyond their means.

3. Rising policy leverage

Insurers are making their products more attractive through premium discounts and higher Day 1 surrender values, while banks are boosting the appeal of their loans by offering higher loan-to-value ratios and waiving handling fees. When these incentives are combined with premium financing, the policy leverage effect can be considerably magnified. We have observed products in the market with leverage ratios exceeding nine times, allowing policy holders to purchase high-value policies by contributing only 10% of the premium upfront.

Since 2023, the IA has required insurers, during affordability assessments, to verify that premium financing customers are capable of fully repaying their loans without surrendering their policies, so as to mitigate the associated risks. In other words, despite the relatively low upfront payment, customers should still have the funds to pay the full premium and the entry threshold has not been lowered. However, a higher policy leverage can amplify illustrated returns and create the perception of "small leverage for big gains", leading customers to overlook the simultaneously amplified risks. Once market conditions change, the financial pressure may increase rapidly, potentially resulting in substantial losses.

The IA is currently conducting its third joint inspection on premium financing with the HKMA, and will consider appropriate regulatory measures with the HKMA in light of the inspection findings.

We once again urge the public to fully understand and evaluate the risks involved in premium financing before considering whether to enter into such arrangements, including:

  • Non-guaranteed benefits fluctuations: For participating policies purchased through premium financing, the illustrated non-guaranteed returns can, in extreme cases, drop to zero. In addition, if policy holders indicate at the point of sale that they intend to hold the policy over the long term, insurers may assume that the policy will not be surrendered early. If a large number of policy holders surrender their policies prematurely due to premium financing, deviating materially from the insurer’s assumptions, it may affect the level of non-guaranteed benefits under the policy.
  • Loan interest rate fluctuations: Interest rates for premium financing loans are typically not fixed, so increases in interest rates will result in higher interest expenses. If the loan is denominated in a currency unfamiliar to the policy holder, interest rate movements may be harder to anticipate and interest expenses may rise beyond expectations.
  • Exchange rate fluctuations: If the loan currency appreciates against the policy currency, the repayment costs for both the loan principal and interest will increase, leading to a much heavier debt burden. Also, a decline in the policy value may cause the loan-to-value ratio (i.e., the ratio of the loan amount to the policy value) to exceed the bank's required level, potentially requiring the policy holder to provide additional collateral or margin.

All the risks described above may have a material impact on the actual costs and returns of premium financing. Moreover, policy holders are exposed not to a single risk as these risks may happen simultaneously. Fluctuations in policy returns, loan interest rates and exchange rates can turn an arbitrage opportunity into a negative carry. This is akin to betting on clearing three hurdles, only to end up falling at all three. Therefore, before considering the use of premium financing, policy holders should fully understand the features and risks of the relevant products, and carefully assess their own financial circumstances and risk tolerance.

We also encourage everyone to visit the IA’s thematic webpage on premium financing. By exploring real-life cases and practical advice, policy holders can gain a deeper understanding of the associated risks, make prudent insurance decisions, and become smarter policy holders.


Marty Lui
Executive Director, Long Term Business, Insurance Authority

Alan Wu
Acting Head of Conduct Supervision, Insurance Authority

5 November 2026