Supervisory standards and requirements
When carrying on business involving the use of premium financing, insurers and insurance intermediaries must comply with the Guideline on Underwriting Long Term Insurance Business (other than Class C Business) (GL16)、Guideline on Cooling-off Period (GL29) and Guideline on Financial Needs Analysis (GL30), as well as the Code of Conduct for Licensed Insurance Agents and Code of Conduct for Licensed Insurance Brokers.
The Insurance Authority (IA) and the Hong Kong Monetary Authority (HKMA) conducted a joint inspection in 2020 and published the key findings in 2021, highlighting areas of improvement including affordability assessment, risk disclosure and sales practices. The IA subsequently issued a circular in April 2022 to clarify the supervisory standards and requirements related to the use of premium financing, covering affordability assessment, additional measures for customers with risk of over-leveraging, disclosure, sales practices and training. The relevant requirements will take effect on 1 January 2023.
If an insurance intermediary is aware of a customer’s intention to use premium financing, the intermediary must take that into account when assessing the ability and willingness of the customer to pay insurance premium. This includes collecting adequate information to ascertain whether the customer has sufficient financial resources to
- pay at the outset the portion of the premium not financed by the premium financing facility;
- meet all scheduled repayments of the premium financing facility, including the principal and interest; and
- repay the sum owed under the premium financing facility if demanded by the financial institution before the policy matures.
- Insurance intermediaries should adopt a holistic approach in assessing the customers’ affordability, e.g. they should ascertain whether the customers have any outstanding liabilities during the Financial Needs Analysis, and whether the customers’ existing insurance policies are used as collateral for any loan facilities.
- Customers should provide to the best of their knowledge the information about their premium financing loan to their insurance intermediaries for protection of their own interests and assessment of their suitability and affordability in using premium financing.
Additional measures for customers with risk of over-leveraging
- Insurers and insurance intermediaries should identify policy applications with a risk of over-leveraging and impose additional measures accordingly, including requesting asset/income proof from the relevant policy holders for verification.
- When verifying the asset proof, insurers should take into account the condition of the assets and apply a reasonable haircut where appropriate, e.g. adjusting the value of assets that are not solely owned by the customers to a level that reflects the customer’s portion of ownership; or adjusting the value of those with outstanding liabilities to net value. Normally, insurers should not accept an owner’s occupied properties as asset proof.
- To help policy holders who intend to use premium financing to make informed decisions and to promote adequate disclosure, the IA has introduced the Important Facts Statement – Premium Financing (IFS-PF).
- IFS-PF sets out the factors to be considered and the risks involved in relation to premium financing. Insurance intermediaries are required to fully explain to the customers the contents of IFS-PF as soon as they become aware of the customers’ intention in the use of premium financing after making sufficient enquiries. The customers concerned are required to complete and sign the IFS-PF for every new insurance policy application involving premium financing.
Sales practices and training
- Insurers and insurance intermediaries must adhere to the principle of “fair treatment of customers” during the product design stage and the sales process respectively.
- When promoting an insurance product, insurance intermediaries should only use materials approved by their appointing principals (i.e. insurers, licensed insurance broker companies or licensed insurance agencies). Principals should also provide adequate training to ensure that their intermediaries have a thorough understanding of the nature and the risks associated with premium financing.
- The training materials on premium financing should be well-balanced without over-emphasising the benefits of leverage effect from premium financing, and strengthen the insurance intermediaries’ knowledge of the risks involved in premium financing and the possible adverse impact on the policies.
- Insurers, licensed insurance broker companies and licensed insurance agencies should have effective internal controls in place to ensure that their staff and insurance intermediaries are compliant with the supervisory standards and requirements related to premium financing.
The HKMA also issued a circular to provide guidance to all authorized institutions when they act in the capacity of the licensed insurance intermediary or premium financing facility provider.