Insurers Breathe Easier... Authorities Misstep

Insurance Repurchase and Transition to Indemnity Insurance Measures

Consumer Persuasiveness Declines, Effectiveness in Question

[Asia Economy Reporter Oh Hyung-gil] Financial authorities are considering measures such as insurance repurchase to ease the severe management difficulties faced by insurance companies, but criticism is already emerging that these measures are out of touch with reality. It is pointed out that the 'same bed, different dreams' between the authorities and the industry is only increasing confusion among insurance consumers.

According to the insurance industry on the 8th, the Financial Services Commission recently began reviewing the introduction of a 'repurchase system' in which insurance companies buy back high-interest fixed-rate insurance contracts sold in the past from policyholders.

Insurance repurchase allows insurance companies to pay a premium to policyholders and buy back insurance contracts so that the contracts can be canceled. This is because high-interest fixed-rate insurance, which promised and sold interest payments of over 5% annually until the early 2000s, now requires management due to increased financial risks such as negative spread and reserve accumulation under the current low-interest rate environment.

However, the insurance industry is skeptical about whether the measure will be as effective as expected. It is not easy to persuade customers holding high-interest products.

As of the end of June last year, among the 589.3 trillion KRW in premium reserves of life insurance companies, fixed-rate products accounted for 41.5%, or 244.4 trillion KRW. The proportion of products sold with high interest rates of over 5% annually also reached 25.4%.

An official from a major life insurance company said, "It is nearly impossible to persuade customers to cancel contracts without giving them money above the guaranteed interest rate or providing equivalent benefits," adding, "Some insurance companies are already struggling to secure funds due to declining sales, so asking them to spend a huge amount to repurchase insurance is unreasonable."

There are also voices that the reinsurance system, which involves paying commissions to reinsurers to transfer high-interest insurance, is ineffective. A reinsurer official pointed out, "Some overseas reinsurers may show interest, but high-interest insurance tends to have low lapse rates and low risk, so it lacks attractiveness for underwriting."

Additionally, the authorities are encouraging contract conversion by applying a differential system to the 'new (신) 실손의료보험 (New Actual Medical Expense Insurance)', where those who receive more insurance benefits pay higher premiums, and those who receive less pay lower premiums.

This is a plan to reduce the burden of premium increases. Insurance companies plan to raise premiums for the 'old (구) actual medical expense insurance' sold before 2017 by 9-10% early this year. Conversely, premiums for the new actual medical expense insurance launched after that are expected to decrease by about 9-10%.

Although the premium difference will widen, it is expected that consumers will find it difficult to switch to the new product. This is because most old actual medical expense insurance policies have 'no deductible' (new actual medical expense insurance since 2009 has a 10% deductible). Since the launch of the new actual medical expense insurance in 2017, only 7.4% of policyholders had switched by the first half of last year.

An official from a non-life insurance company predicted, "From the consumer's perspective, they are unlikely to cancel actual medical expense insurance without a deductible just because the annual premium increases by a few tens of thousands of won," adding, "Only younger people who rarely claim insurance may consider switching."

This content was produced with the assistance of AI translation services.