Premium financing is an insurance funding arrangement where a policy holder borrows funds from a financial institution (usually a bank) to pay for the premium of a new insurance policy, and in doing so, assigns part or all of the rights under the insurance policy to the financial institution as collateral.
While premium financing allows the policy holder to scale up the insurance policy value using the same amount of principal, it is not without risks. For example, the policy holder may be exposed to interest rate risk where interest rate hike may cause financial loss to him/her; the actual amount of non-guaranteed benefits of the insurance policy may be lower than that shown in the benefit illustration which may cause the total return of the insurance policy to be lower than the interest of the premium financing facility and lead to financial loss to the policy holder; and the policy holder will not be able to exercise the rights that are assigned to the financial institution unless approval from the financial institution is obtained (e.g. cancel the insurance policy within the cooling-off period). You can visit the dedicated webpage of the Insurance Authority (IA) to know more about premium financing and the smart tips on using it.
The HKMA and the IA conducted a joint inspection on premium financing activities of insurers and licensed insurance intermediaries (including banks) in 2020 and published the key findings on 30 September 2021 covering areas on affordability assessment, risk disclosure, sales practice, etc.
On 1 April 2022, the HKMA issued a circular providing further guidance to banks in complying with the supervisory standards and requirements on premium financing activities stipulated in the circular issued by the IA on the same day when acting as licensed insurance intermediaries, as well as when acting as premium financing facility providers.
When a bank acts as a licensed insurance intermediary, it should:
assess whether the customer faces risk of over-leveraging, and should not recommend an insurance policy that would amount to such risk unless with sufficient justification;
explain to the customer the justification when recommending an insurance policy that would amount to risk of over-leveraging; and
disclose and explain to the customer the key features and risks of premium financing, including the “Important Facts Statement - Premium Financing” and other relevant terms and conditions, risks and features that may be involved with the use of premium financing.
In addition, when a bank acts as a premium financing facility provider, it should:
be mindful of imposing any conditions or costs under the premium financing facility that may deter the customer from exercising his/her cooling-off right;
promptly process the return of refunded premium from cooling-off from the insurer to the customer after netting of the outstanding amount and interest of the premium financing facility; and
where risk of over-leveraging exists, take into account whether the ratio of the loan amount of the premium financing facility to the customer’s existing own financial resources is within a reasonable level in its credit assessment, and disclose such ratio to the customer before the customer accepts the premium financing facility offer.