The greatest risk lies in the inherent instability of the arbitrage opportunity itself.

Chen Lin (pseudonym), who works in foreign trade business in Shenzhen, learned about a "new deposit" scheme that promises to "double in seven years" through a Hong Kong insurance intermediary in June this year. Using 120,000 HKD of his own funds plus a 480,000 HKD bank loan, totaling 600,000 HKD, he purchased a Hong Kong savings insurance policy. He also paired it with a dividend fund with an annual yield of 6.75%, with returns used to service quarterly loan interest payments. The intermediary claimed that surrendering the policy after seven years would return approximately 1.2 million HKD, representing an annual simple interest rate exceeding 10%.

However, just over two months later, with fluctuations in Hong Kong dollar interest rates, Chen Lin's borrowing costs increased by more than 10% compared to before, while the fund dividends failed to meet expected levels. What concerns him more is that the originally promised "stable returns" depend entirely on non-guaranteed dividends, and the insurance company's latest disclosed dividend realization rates are not high, meaning final returns could be significantly lower than expected.

Chen Lin's experience reflects the current overheating in Hong Kong's premium financing market. Against the backdrop of declining market interest rates, these financing schemes packaged as "new deposits" or "advanced wealth management" are rapidly spreading through social media platforms, attracting investors with promised annual returns exceeding 10%. Investigation reveals that the essence is using bank loans to purchase policies, then profiting from the "spread" between promised policy returns and loan interest rates.

Investigation found that although current Hong Kong Interbank Offered Rate (HIBOR) is at low levels, combined with relatively high expected returns from Hong Kong savings insurance, there appears to be considerable arbitrage opportunity on the surface. However, multiple risks lurk beneath: interest rate volatility could cause spreads to narrow rapidly, uncertainty exists in non-guaranteed dividend realization rates, plus liquidity shortages and potential significant losses from early policy surrender.

More notably, related policy complaints have increased significantly in recent years, involving sales misconduct and inadequate customer repayment capacity assessments.

The Hong Kong Monetary Authority has issued multiple warnings, emphasizing that banks and insurance institutions must adhere to sales compliance requirements and eliminate improper promotions. Industry professionals interviewed believe that Hong Kong premium financing is not ordinary deposits - its complex structure and multiple risk attributes make it suitable only for professional investors with strong risk tolerance.

**The Mysterious "New Deposit"**

Against the backdrop of declining market interest rates, a type of "new deposit" or "advanced Hong Kong policy strategy" claiming annual yields exceeding 10% is rapidly emerging on social platforms, attracting investors with promotions like "6-fold growth in 27 years" and "doubling in 7 years". After consulting multiple business handlers as an investor, investigation revealed that these so-called high-yield products are essentially Hong Kong's premium financing business.

According to Hong Kong insurance agent Lily (pseudonym), this model resembles "taking a mortgage to buy property": investors only need to pay 10% to 20% as a "down payment," with the remaining 80% to 90% funded by bank loans, using the policy's cash value as collateral.

Specifically, premium financing operations involve three main participants: the policyholder, bank, and insurance company. After signing the policy, the policyholder pays the "initial" premium themselves, then applies for a bank loan using the policy issued by the insurance company. The bank reviews the materials provided by the policyholder, and upon approval, transfers the unpaid premiums to the insurance company while the policy is pledged to the bank.

Multiple insurance agents emphasize that this leveraged operation can generate high returns through "arbitrage." The underlying logic is that insurance companies' promised policy returns often exceed bank loan interest rates, allowing policyholders to earn the "spread" between policy returns and loan rates through premium financing.

(Image shows premium financing calculations for a certain policy product, provided by interviewee.)

Lily calculated an example for us: total policy premium of 1 million USD, customer only needs to pay 181,000 USD upfront, with the remaining over 800,000 USD paid through bank loans. At a 1.8% loan rate, annual interest payments would be 13,100 USD. In an optimistic scenario, surrendering in year 7 with 100% dividend realization rate would yield a "net profit" of 273,870 USD after deducting all costs, representing an annualized return of 21.62% based on initial payment.

Some insurance agents also recommend "insurance + wealth management" combination schemes. Senior Hong Kong insurance intermediary Lu Wei (pseudonym) recommended an "8-year doubling + cash flow combination" scheme. In this arrangement, customers need to do 500,000 HKD in policy financing with a loan amount of 1.67 million HKD. Assuming a 3.3% loan rate, customers need to pay approximately 13,700 HKD in quarterly interest. Lu Wei suggested allocating 800,000 HKD to a fund product claiming 6.75% annual returns, using quarterly dividends of about 13,500 HKD to "cover" most interest expenses.

Through this combination, the total net return rate upon one-time surrender in year 8 would be 112%, with an annual simple rate of 14%. Lu Wei claimed this means 1.3 million HKD could potentially double to over 2.6 million HKD.

**Queuing for "Quotas"**

Recently, premium financing market heat has risen significantly, with some banks experiencing quota shortages requiring customers to "queue" for availability. An insurance agent revealed that current bank financing quota applications for such policies are scheduled until October. Due to banks setting total quota controls, he suggested customers could first go to Hong Kong to sign agreements and secure spots, then complete account opening and material submission when banks open appointment slots in September or October.

Investigation found that Hong Kong premium financing has existed since 2015 but wasn't a mainstream market model. Why has Hong Kong premium financing begun "trending" recently? This relates closely to current market environment changes.

A Hong Kong insurance analyst pointed out that currently, major global economies have low interest rates, with Hong Kong dollar and US dollar financing costs declining, leading to lower customer loan rates. Meanwhile, adjustments to Hong Kong savings insurance demonstration rates lag, keeping policy surface yield rates at high levels, seemingly expanding arbitrage opportunities.

Investigation noted that this year's Hong Kong Interbank Offered Rate (HIBOR) overall levels haven't been high. In June, due to massive capital inflows, HIBOR once fell below 0.05%. Hong Kong dollar liquidity in the banking system surged to over 120 billion HKD, with extremely low short-term financing costs. Although HIBOR rebounded quickly in August, it currently remains around 2.8%.

Lily explained that most premium financing is priced at "3-month HIBOR + 0.8%." In June, due to low Hong Kong dollar rates, some banks could offer premium financing annual rates of 1.3-1.5%, making "borrowing to buy insurance" exceptionally attractive and spawning many new "bank + insurance" combination strategies.

Meanwhile, Hong Kong insurance demonstration rates have remained at high levels. Previous reports indicated Hong Kong insurance typically includes three layers: "guaranteed dividends," "reversionary bonuses," and "terminal bonuses," with their sum forming the demonstration rate. Post-pandemic, due to intensified market competition, most insurance companies significantly raised long-term expected returns to over 7% by increasing policy equity investment ratios. Recently, after "shifting gears" under regulatory requirements, maximum policy demonstration rates can still reach 6.5%. Against this backdrop, Hong Kong insurance agents often display arbitrage opportunities of up to 5% to customers and further promote investment visions of "annual returns exceeding 10%."

Simultaneously, insurance agents also package premium financing concepts. During communications with multiple agents, investigation found many use concepts like "large denomination certificates of deposit" and "new deposit products" to package insurance or "insurance + wealth management" products without adequately highlighting underlying risks. Some mainland customers may have purchased premium financing products without clearly understanding the risks.

For example, in Lu Wei's recommended "8-year doubling + cash flow combination" scheme, promotional materials showed allocation to a "large denomination certificate of deposit" product, but investigation revealed this was actually a fund product with floating returns.

**Underlying Uncertainties**

Premium financing often uses "high returns, low barriers" as selling points, but multiple risks and uncertainties lurking behind may go unnoticed by policyholders.

First, premium financing has relatively high entry barriers. An insurance agent explained that premium financing first requires entry thresholds - for example, for 200,000 USD premium financing, corresponding 200,000 USD asset proof is needed. These proofs must come from banks or securities companies, showing asset status within the past three months and maintaining stability. "This is actually quite similar to qualification reviews when buying property."

Additionally, there are hidden rules. The insurance agent further explained that for premium financing business, some banks have minimum deposit requirements, somewhat like "bundling." "For example, when purchasing certain products, customer accounts need to maintain at least 100,000 HKD. If deposit amounts reach 1 million HKD, interest rates can be reduced by another 0.5%."

But the greater risk lies in the inherent instability of the arbitrage opportunity itself.

"In extreme scenarios, return rates could drop from over ten percent to three or four percent," Lu Wei candidly told us. First is interest rate risk. If market rates remain persistently high - for example, if policy expected returns are 5% while financing rates rise to 4% - spreads would narrow significantly to 1%, substantially reducing profit margins. If rates remain high throughout the entire 7-year period, overall returns could be lower than expected. Second is dividend realization rate risk. If originally expected year-7 surrender policy value was 2 million HKD, but dividend realization rates only reach 90%, actual value might drop to 1.8 million HKD, directly creating a 200,000 HKD shortfall.

Moreover, early surrender could also bring significant losses. Hong Kong Monetary Authority Deputy Chief Executive Arthur Yuen wrote in 2024 that rising interest rates would increase policyholders' interest costs. If customers cannot pay interest on time or repay loans as required by banks, they might be forced to surrender policies to repay loans. At that time, policy surrender values could be far below the sum of premiums paid and accumulated interest, causing customers to suffer substantial financial losses.

Notably, business complaints involving premium financing have continued climbing in recent years. According to Hong Kong Monetary Authority data, bank complaints related to premium financing numbered 4, 34, and 48 cases respectively from 2021 to 2023, showing clear growth.

Recent complaints mainly concentrate on three issues: first, customers claiming they weren't aware they had obtained bank loans, mistaking monthly interest payments for premium payments; second, accusations of false statements by sales personnel, such as promising "dividends will definitely cover interest expenses" or "leveraged operations will inevitably bring higher returns"; third, sales personnel falsely reporting customer liquid assets in financial burden capacity assessments to facilitate approval of high-premium policies.

Some insurance institutions have irregular operations when recommending financing policies, further amplifying leverage risks. Hong Kong Monetary Authority disclosed regulatory inspection information in mid-2024 showing some institutions required customers with potential affordability mismatches to modify Financial Needs Analysis (FNA) forms multiple times to "reconfirm" their financial situations, thereby increasing available financial capacity or premium payment willingness - this practice makes the reliability of customers' true financial situations questionable. Some lending banks only conducted credit assessments based on customers' ability to repay monthly interest without verifying whether excessive leverage risks existed.

(Source: Hong Kong Monetary Authority)