4 May 2016
Mainland Residents Warned of Risk in Buying Insurance from Hong Kong
The China Insurance Regulatory Commission (CIRC) recently issued a warning to mainland residents on the risks of purchasing insurance products in Hong Kong in view of the surge in cross-border deals.
In a statement, CIRC highlighted those risks in five aspects, namely legal, foreign exchange, yield, policy surrender and specific clauses.
The warning came amid the boom in Hong Kong’s life insurance market thanks to the dramatic surge in spending by mainland visitors on new policies last year. According to statistics, mainland visitors’ new office premiums amounted to HK$31.6 billion, representing 24.2% of the total new office premiums (HK$130.9 billion) for individual business in 2015. In March this year, rumours were rife about China’s imminent move to halt jumbo insurance policies. Officials of the State Administration of Foreign Exchange said that individual mainland residents buying life insurance and with-profits insurance policies offshore are transactions in the capital account. Such transactions have not been liberalised under the current foreign exchange management policy.
CIRC warned that insurers are not protected by PRC laws.
First, mainland residents buying Hong Kong insurance policies are required to travel to Hong Kong and sign the relevant policy. Purchasing Hong Kong policy in the mainland is underground deal which is illegal and not eligible for legal protection either in the mainland or in Hong Kong.
Second, Hong Kong laws are applicable to insurance purchased by mainland residents in Hong Kong. The insured will litigate in accordance with the laws of Hong Kong in case of any disputes. Compared with the mainland, litigation fees in Hong Kong are higher, resulting in higher costs in time and money. While they may choose to lodge insurance claims complaints to Hong Kong’s Insurance Claims Complaints Bureau which can only handle compensation of up to HK$1 million, compensation disputes of jumbo insurance policy cannot be adjudicated by the Bureau.
Third, returns for the policy carry uncertainty and policyholders need to manage own exchange rate risk. On the one hand, compensation and claims are settled in Hong Kong dollar/US dollar, consumers need to bear the foreign exchange risk. On the other hand, individual mainland residents travelling outside the mainland to buy life insurance and with-profits policies that are entitled to reversionary bonus are transactions under the capital account. Such transactions have not been liberalised under the current foreign exchange management policy. There are some policy risks.
Fourth, the bonus rates of with-profits policies are not guaranteed. Mainland insurance products are subject to the current regulatory requirements of paying out on the basis of low, medium, or high bonus rates, with the interest rate ceiling of 3%, 4.5% and 6%, respectively. In Hong Kong, market forces operate in the insurance industry which has no clear requirements for bonus rates although most products usually give investment yield of more than 6% as bonuses. Bonus itself is non-guaranteed income, which has great uncertainty.
Fifth, policyholders will suffer great loss if a policy is surrendered in the beginning years during which the cash value of the policy is low. Surrender halfway, they can only get the cash value of the policy. Hong Kong regulators do not have specific requirement on the cash value of insurance products. The cash value of the majority of long-term policies paid in regular installments is very low in the beginning years, or at zero within the first two years. Policyholders will suffer great loss if they surrender the policy during this period.
In addition, contracts of the Hong Kong insurance products are written in traditional Chinese characters and English and are expressed differently from those of the mainland. Policyholders are advised to carefully read the terms, fully understand the major clauses such as insurance liability and conditions for making claims to avoid dispute arising from inaccurate understanding of the terms.
For details of the statement in Chinese, please see: