On 30 July 2025, the Hong Kong Insurance Authority (“IA”) issued the Practice Note on Remuneration Structures of Authorized Insurers for Licensed Insurance Intermediaries for Participating Policies (“Practice Note”) to ensure fair customer treatment throughout the insurance life-cycle.

The IA has reminded the market and the public on various occasions¹ that intermediary commission structure is important in ensuring fair customer treatment. A commission structure purely focusing on the volume of business with most of the commission paid out in the first year of the policy term may incentivise aggressive sales practices and poor on-going servicing, resulting in unfair customer treatment. The Practice Note serves to address this issue.

The Practice Note supplements GL16: Guideline on Underwriting Long Term Insurance Business (other than Class C Business) (“GL16”). Pursuant to it, for participating policies², insurers must pay no more than 70% of the total commission during the first policy year³. The remaining commission must be spread evenly over a period of at least 5 years, or the premium payment term, whichever is shorter.

Applicability of the Practice Note

This Practice Note applies to participating insurance policies with regular premium payment terms and will take effect from 1 January 2026.

Key Requirements

Pursuant to GL16, when designing remuneration structure for intermediaries, insurers must seek to align (i) the interests of policyholders in receiving pre- and post-contract servicing with (ii) the incentive for intermediaries to provide both servicing.  Pursuant to the Practice Note, to satisfy such requirement, as a minimum, the commission payable to intermediaries in respect of participating policies must be prorated such that (“Spreading Requirement”):

(a) no more than 70% of the total commission payable is paid to the intermediary during the first policy year; and

(b) the remaining commission after the first policy year must be paid at least over a minimum of 5 years or the premium payment term, whichever is shorter, and must be spread evenly over this period.

The IA also encourages insurers to go beyond the above minimum requirements by (i) paying less than 70% of the total commission during the first policy year; and (ii) spreading the remaining commission over a period longer than 5 years.

Exceptions

In summary, an insurer may depart from the Spreading Requirement in the following situations:

(a)Where the value of the commission payable to an agent is determined based on factors including objective non-financial metrics (such as positive customer feedback and persistency rate of insurance policies produced) to evaluate the agent’s performance in complying with the “treating customers fairly” principle;

(b) Where the insurer pays the agent a fixed remuneration package i.e. such remuneration is contractually payable irrespective of whether any policy is arranged and serviced or the volume of premium;

(c) Where the insurer distributes its products via banks, provided that the overriding principles governing appropriate remuneration structures in GL16 are met; and

(d) Where the policyholder is a Professional Investor⁴, provided that in structuring the commission, the overriding principles governing appropriate remuneration structures in GL16 are met.

Practical Tips

In anticipation of the Practice Note taking effect in a few months’ time (1 January 2026), insurers are reminded to:

(a) Review the Practice Note thoroughly;

(b) Revisit their existing remuneration structures and put in place proper controls and procedures to ensure compliance;

(c) Arrange proper training and communication with their intermediaries in respect of the new requirements; and

(d) Have appropriate systems in place to enable them to maintain sufficient records to demonstrate compliance. For example, insurers relying on non-financial metrics to justify their departure from the Spreading Requirement must retain relevant documentation for 7 years and produce it upon the IA’s request.

The full Practice Note can be accessed here.

Notes:

1. For example, Issue 8 of Conduct in Focus; Paragraph 5.4 of the Note on the Green Light Process for Assessment of Investment-Linked Assurance Scheme; Paragraph 9 of the GL16: Guideline on Underwriting Long Term Insurance Business (other than Class C Business).
2. A participating policy is commonly featured in long term insurance products that have a savings element. It provides policyholders with life protection, as well as non-guaranteed benefits by distributing dividends or bonuses, allowing policyholders to share the product profits.
3. The first policy year means the 12-month period commencing from the policy effective date.
4. As defined in Schedule 1 to the Securities and Futures Ordinance (Cap.571) and the Securities and Futures (Professional Investor) Rules (Cap.571D).