Insurance watchdog clarifies rate caps

The Insurance Authority clarifies that the introduction of illustration rate caps only applies to implied rates of returns and aims to protect investors amid the intensified competition among insurers.

Last month, the insurance watchdog announced a new rule that all insurers need to set rate caps for projected returns of 6 percent for Hong Kong dollar-denominated policies and 6.5 percent for non-Hong Kong dollar-settled when they are issuing benefit illustrations for participating policies from July 1, 2025.

The new requirement, however, was interpreted on social media that the caps are on return rates of participating policies, and some posts urged the policyholders to “catch the last train.”

It comes as insurers are racing to attract customers with exceptionally high expected returns of the non-guaranteed component of participating policies while there is a possibility that the companies fail to achieve the “overly optimistic return projections,” IA explained.

IA warned that the missed return rates would seriously disappoint customers, especially for some products with a higher level of non-guaranteed components that are by nature more volatile and riskier.

Hong Kong’s insurance sector has rebounded quickly since the border with mainland China reopened in 2023. The total gross premiums reached HK$480.8 billion for the first three quarters of the last year, 12 percent higher than one year ago, the latest official data showed.

The authority reiterated that the “illustration rate caps” will not affect the actual policy returns as they only apply to the internal rate of returns implied in benefit illustrations offered by insurers to customers at the point of sale for participating policies, and insurers can still pay dividends that are higher than the caps.

The insurance industry has made a positive response to the initiative and is working on compliance with the new requirements, including updating their systems and providing training for the intermediaries, IA said.

IA believes the illustration rate caps would prevent overly aggressive illustrations and sales practices, helping the insurers compete healthily.

STAFF REPORTER