30 March 2025
The Insurance Authority (IA) issued a Practice Note at the end of February regarding illustration rates in the benefit illustrations for participating policies, setting rate caps of 6% for Hong Kong dollar-denominated policies and 6.5% for non-Hong Kong dollar-denominated policies. The rate caps will take effect on 1 July 2025.
Following the announcement, we have noticed certain misunderstandings emerging on social media regarding the initiative, with some posts portraying it as "capping the return rates of participating policies" and urging policy holders to "catch the last train". We wish to take this opportunity to clarify these misunderstandings.
Competition among insurers on illustration rates for participating policies has intensified in recent years. Some insurers have tried to attract customers with exceptionally high expected returns, without adequately addressing the volatility and risks associated with the non-guaranteed component of participating policies. This results in overly optimistic return projections, and consequently, the possibility that the insurer cannot ensure a fair chance for policy holders in achieving the expected non-guaranteed returns as required. These sales practices may also violate the principle of "treating customers fairly". Once the non-guaranteed returns fall far lower than the illustrated ones, it would cause a serious expectation gap for the customers, especially in the case of policies with a higher level of non-guaranteed components which are inherently more volatile and carry greater risks. In light of this, we believe that introducing illustration rate caps for participating policies will prevent overly aggressive illustrations and sales practices, thereby fostering healthy competition in the market.
It is also important to note that “illustration rate caps” only apply to the internal rate of returns implied in benefit illustrations provided by insurers to customers at the point of sale for participating policies. Insurers can still pay dividends that exceed these caps, so the initiative will not impact the actual policy returns. Over the years, local insurers have developed and offered a diverse range of participating products. The new initiative will not undermine the actual policy returns or market competitiveness of these products as long as insurers uphold their capability to drive product innovation, enhance their asset allocation strategy and effectively manage their customers’ reasonable expectations.
Some social media posts suggest that the initiative “caps the policy return rates”. This is certainly not the case. Illustration rate caps only apply to benefit illustrations provided to customer at the point of sale by the insurers after 1 July this year; they will not impact the future returns of these policies. Of course, we should all keep in mind that the non-guaranteed returns of a participating policy are subject to multiple factors, including the insurer’s investment strategy and performance, claims experience and operational expenses etc. We would like to remind all prospective policy holders to be aware of the risk warnings about non-guaranteed returns of the participating policies before making a purchase.
The industry has responded positively to the initiative and is actively preparing for compliance with the new requirements, such as updating their systems and providing training for the intermediaries. The IA is also engaging with the industry to discuss other regulatory measures related to participating policies.
Public education is just as crucial as industry regulation. We strongly encourage the public to visit the IA’s thematic webpages on participating policies and fulfilment ratios for an informed decision before taking out a policy.
Participating policies are popular products, and our enhanced measures aim to strengthen protection for policy holders and ensure sustainable growth of the market. We will continue to engage closely with the industry and seek feedback on the implementation details of the measures.
Marty Lui
Executive Director, Long Term Business, Insurance Authority
30 March 2025