Hong Kong Insurance Authority Issues Practice Note on Remuneration Structures and Commission Spreading for Participating Policies

On 30 July 2025, the Hong Kong Insurance Authority (IA) issued a new Practice Note on Remuneration Structures of Authorised Insurers for Licensed Insurance Intermediaries for Participating Policies (Practice Note), setting out its expectations regarding commission practices for licensed insurance intermediaries involved in the sale of participating long-term insurance policies with regular premium payment terms.

This Practice Note supplements the requirements under the Guideline on Underwriting Long Term Insurance Business (other than Class C Business) (GL16) and builds upon the principles established in the Guideline on the Establishment and Maintenance of Fund(s) in Respect of Participating Business (GL34), which regulates the management of participating business to ensure fairness, transparency, and fair treatment of policyholders.

Commission Spreading Practices and New Requirements

The IA has raised concerns that aggressive commission spreading practices which disproportionately reward intermediaries at the point of sale often result in misaligned incentives and insufficient post-sale servicing. To address this, the Practice Note calls for a review and, where required, revision of remuneration frameworks to ensure fair treatment of policyholders and to incentivise ongoing engagement by the insurance intermediaries with its policyholders throughout the life of the policy.

Going forward, authorised insurers must ensure that no more than 70% of the total commission is paid during the first policy year. The remaining commission must be spread evenly over a period of at least five years, or the premium payment term, whichever is shorter. Such requirement applies to all types of licensed insurance intermediaries, including individual agents, insurance agencies, and insurance broker companies.

Insurers are encouraged to adopt practices that go beyond the minimum requirements, such as paying less than 70% of commission upfront and spreading the remaining commission over a period longer than five years, to further strengthen alignment with policyholder interests.

The IA also recognises that certain commission payments such as overriding commissions may be made to individuals who are not directly responsible for introducing or arranging the policy. These include agent managers, who may receive commission based on the performance of producing agents under their supervision. In such cases, the spreading requirement does not apply to the overriding commission paid to the agent manager, provided that in determining the amount of overriding commission, the authorised insurer factors in objective non-financial performance metrics (e.g. persistency ratio, the variety and proportion of different products in the policy portfolio, positive customer feedback, and the retention rate of producing agents under management), the design of which must be reasonable, conducive to adherence to the “treating customers fairly” principle, and be properly justified to ensure that they effectively evaluate the performance of the licensed insurance agents against the “treating customers fairly” principle.

Various other exceptions to the commission spreading requirement are clearly set out in the Practice Note. These include:

1. Bonus commissions for licensed insurance agents, where the determination of the bonus is not solely based on business volume, but also incorporates objective non-financial performance metrics that evaluate the agent’s compliance with the “treating customers fairly” principle. Such metrics may include persistency rate of policies produced, arranged and serviced, the variety and proportion of different products in the policy portfolio, positive customer feedback, and the retention rate of agents under management;
   
   
2. Fixed remuneration packages for licensed insurance agents, where payment is contractually guaranteed and not contingent on policy arrangement or premium volume;
   
   
3. Commission payable to licensed insurance agencies that are authorised institutions under section 2 of the Banking Ordinance (Cap. 155), in view of the distinct business model and operational structure of the bancassurance channel, provided that such agencies continue to meet the overriding principles under GL16;
   
   
4. Commission payable on participating policies entered into by professional investors, as defined under the Securities and Futures Ordinance (Cap. 571) and its subsidiary legislation, provided that the insurer:
• has established and implemented adequate and effective controls and processes to ascertain whether a potential policy holder qualifies as a professional investor during the on-boarding and know-your-client process;
• is satisfied that the policy holder, in accordance with such controls and processes, has been identified as a professional investor; and
• in structuring its commission payable to the license insurance intermediary introducing the policy holder, arranging and servicing the policy, is satisfied that the overriding principles governing appropriate remuneration structures as stated in GL16 is met on a continuous basis.

To support implementation, the Practice Note also includes a detailed FAQ section that includes examples of compliant and non-compliant remuneration structures, helping insurers and intermediaries navigate complex cases with greater clarity.

Governance and Policyholder Protection

This Practice Note is closely aligned with the principles set out in GL34, which sets out minimum standards and practices for governance of participating funds, including the need for an authorised insurer to, among others, (i) identify the assets and liabilities attributable to the participating business; (ii) ensure that the opening balance of assets in an applicable participating fund is no less than the amount of assets that is attributable to that participating business on the date immediately before the effective date; (iii) to allocate any costs of an applicable participating fund in a fair, equitable and reasonable manner, meaning they must be proportionate to the services rendered, transparent in methodology, and not unduly favour shareholders, other business lines, or specific policyholder groups. Costs should be directly attributable to the participating business, consistently applied, and supported by clear documentation and governance oversight to ensure alignment with policyholder interests; (iv) establish a clear framework for allocating distributable surplus/profits based on a defined profit-sharing mechanism which must be approved by the board, applied consistently across relevant policies, and clearly documented, with governance processes in place to ensure that discretionary decisions are made transparently and do not confer undisclosed or unfair advantages to shareholders or other stakeholders; (v) clearly document any capital support provided by shareholders to an applicable participating fund; and (vi) physically segregate assets attributable to the part of its business for which an applicable participating fund is maintained separately from its other long term business.

The Practice Note reinforces the broader regulatory objective under GL34: to ensure that participating business is managed sustainably and that policyholders are treated fairly throughout the duration of their policies.

Next Steps for Authorised Insurers

The Practice Note shall come into effect on 1 January 2026. The issuance of the Practice Note also marks a significant step in the IA’s ongoing efforts to enhance policyholder protection and promote sustainable practices within the insurance industry. Authorised insurers should commence a comprehensive review of their existing commission arrangements with their intermediaries to assess compliance with the Practice Note. Insurers must maintain sufficient records and be prepared to demonstrate compliance with the Practice Note upon request. In particular, documentation justifying the design of non-financial performance metrics must be retained for seven years.