Hong Kong’s Insurance Authority (IA) has issued a circular advising all authorised long-term insurers to review the design, pricing, distribution and risk management of premium-financing insurance products after a sharp rise in such business in the first half of 2026 raised concerns over lapse risk, liquidity and customer outcomes.
In a circular dated August 20 and addressed to chief executives of long-term business, the regulator pointed to a “marked increase” in the use of premium financing facilities to purchase long-term insurance policies this year. For some insurers, premium-financing business has become the major source of new business sales, it said.
The IA said authorised insurers should ensure risks associated with premium-financing business are “appropriately identified, monitored and managed” in line with their obligations under Hong Kong’s Insurance Ordinance and existing supervisory requirements.
The circular follows heightened regulatory scrutiny of premium financing in Hong Kong in recent months. In June, Manulife withdrew the leverage feature from a Hong Kong life insurance policy with a nominal value of US$80m using leverage of nearly four times and offered returns exceeding 10%. The withdrawal came after IA chief executive Clement Cheung flagged instances of “some premium financing and relatively creative financial arrangements in the industry.”
IA reviews found sales materials suggesting a policyholder could reach policy leverage of up to nine times by contributing only 10% of the premium, through the combined effect of the premium discount, the “Day 1” surrender value and the loan-to-surrender value ratio.
“These sales materials also tactfully highlighted the prospect of higher leveraged returns over a shorter
holding period, but fell short in properly disclosing the downside risks like the effects of adverse policy performance or rising borrowing costs,” it observed.
The IA warned that some policyholders appear to be using premium-financing products for short-term interest-rate arbitrage despite the products being designed for long-term wealth accumulation.
While premium financing is predominantly used with whole-of-life participating policies, the regulator said premium-financing policyholders are “more likely to surrender their policies once the targeted return has been achieved or the loan tenor has expired”, creating a mismatch between product design and customer behaviour.
The IA said leverage aggravates lapse risk, with knock-on effects on liquidity where less liquid assets such as private credit and private equity back those policies. In stressed scenarios, it said, concentrated premium-financing exposures may lead to correlated asset sales at depressed prices.
The IA said reliance on cuts to policyholders’ non-guaranteed benefits as the primary or predominant mitigant for higher-than-expected lapse rates, warning the practice calls into question whether risks were adequately addressed through product design and pricing. It also said non-premium-financed policyholders could be affected because they share returns from the same participating fund pool.
“The IA will step up supervisory surveillance activities to closely monitor developments in premium financing activities and remain vigilant to practices that diverge from established supervisory standards and requirements,” the circular said.
The IA and the Hong Kong Monetary Authority have scheduled another round of joint inspection on premium financing in the second half of 2026.
The move also comes amid broader efforts by authorities in Hong Kong and mainland China to tighten oversight of cross-border wealth channels, a key source of business for insurers serving affluent Chinese customers.
