On 28 Feb 2025, the Insurance Authority issued a Practice Note requiring authorized insurers to implement illustration rate caps of 6.0% (HKD) and 6.5% (other currencies) on Customers’ IRR for benefit illustrations of participating policies at point of sale. The measure supplements existing GL16 and GL28 requirements to prevent overly optimistic projections, applies from 1 July 2025, and excludes promotional offers and re-illustrations. The IA will review caps periodically based on market conditions.
This article was generated using SAMS, an AI technology by Timothy Loh LLP.
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Introduction and Objective
On 28 Feb 2025, the Insurance Authority (IA) issued a Practice Note establishing illustration rate caps for benefit illustrations of participating policies to ensure realistic customer expectations and compliance with the principle of 'treating customers fairly'. The Practice Note supplements existing requirements under Guideline on Underwriting Long Term Insurance Business (GL16) and Guideline on Benefit Illustrations for Long Term Insurance Policies (GL28), addressing concerns about overly optimistic illustrations driven by aggressive investment assumptions and insufficient guaranteed benefits.
Application Scope
The Practice Note applies to benefit illustrations for participating policies at the point of sale, defined under section 21B of the Insurance Ordinance. It excludes Qualifying Deferred Annuity Policies and universal life policies, as overly optimistic illustrations are uncommon for these products. The IA adopts a 'substance over form' approach, requiring all benefit illustrations—including those generated via digital tools, financial calculators, or sales portals—to comply with the rate caps, except for re-illustrations. Campaign promotions not reflected in projected policy values are excluded from the requirements.
Illustration Rate Caps
Authorized insurers must implement rate caps of 6.0% for Hong Kong Dollar-denominated products and 6.5% for other currencies on Customers’ Internal Rate of Return (IRR) in benefit illustrations. These caps apply across all payment modes, policy options, terms, and scenarios (base, optimistic, pessimistic). Insurers must use the actual IRR if below the cap, adhering to GL28’s best-estimate requirements. The caps aim to prevent unrealistic projections while allowing flexibility for meaningful rate differentials across market conditions and product characteristics.
Implementation and Compliance
Insurers must ensure caps are straightforward, with a single currency-based cap preferred to simplify administration. Products with aggressive illustrations may require revisions to benefit documents, non-guaranteed benefits, or product design, to be implemented orderly under a pre-set timeline. The Practice Note does not limit underlying investment assumptions or actual policy returns but mandates adherence to Actuarial Society of Hong Kong’s Guidance Note 9 for best-estimate assumptions. Re-illustrations of in-force policies are exempt from the caps, but insurers must avoid using them for aggressive selling practices.
Commencement and Review
The Practice Note takes effect from 1 July 2025, applying to all point-of-sale benefit illustrations. The IA reserves the right to review and update the caps based on regional economic outlooks, market practices, and investment portfolios. Future measures may expand applicability to other products or update standards to reinforce 'treating customers fairly'. Insurers must implement controls, maintain records, and demonstrate compliance to the IA, with non-compliance potentially impacting fitness and properness assessments of key personnel.
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