Next Month's Consecutive Insurance Premium Increases... Life Insurance Companies Advertising 'Jeolpan Marketing' (Comprehensive)

Lowering Expected Interest Rates as Profitability Declines Due to Low Interest Rates
Operating Asset Yield Falls to 3.4% Range Over 5 Years

[Asia Economy Reporter Oh Hyung-gil] As major life insurance companies announce premium hikes next month, 'sold-out marketing' campaigns that halt sales have even appeared at sales sites.

Although the reason is the deteriorating profitability due to the continuation of historically low base interest rates, there are concerns that this could lead to poor performance amid a household economy weakened by the impact of the novel coronavirus infection (COVID-19).

According to the insurance industry on the 14th, starting with Samsung Life Insurance, some life insurers plan to lower the assumed interest rate for interest rate-linked products from next month. Samsung Life Insurance announced in a conference call last month that it would lower the assumed interest rate by about 0.25 percentage points for some interest rate-linked products starting next month. This is an additional measure following the 0.25 percentage point cut in the assumed interest rate for whole life insurance products in April.

Kyobo Life Insurance also announced that it will change the assumed interest rate from 2.25% to 2% starting next month. Hanwha Life Insurance also lowered the assumed interest rate once again in July following a change in April.

As the 'Big 3' life insurers implement assumed interest rate cuts, small and medium-sized insurers are also expected to follow suit. Mirae Asset Life Insurance is reportedly planning to lower the assumed interest rate for some whole life insurance products from 2.4% to 2.25%, a 0.15 percentage point cut, starting next month.

"Sold-out Marketing" Surges Before Premium Hikes

The assumed interest rate refers to the expected rate of return that an insurance company can earn through the management of premiums received from customers until the payment of insurance benefits and refunds.

It is the basis for calculating the premiums customers must pay. When the expected rate of return decreases, the insurer raises the premiums for products with the same coverage conditions. Generally, when the assumed interest rate decreases by 0.25 percentage points, premiums are known to increase by about 5 to 10%.

The reason life insurers have lowered the assumed interest rate twice this year can be found in the prolonged low interest rate environment.

The Bank of Korea made a big cut in March (from 1.25% to 0.75%), opening the era of a base interest rate in the 0% range for the first time in history, and then lowered the base rate by another 25 basis points to 0.50% annually just two months later. The yield on long-term government bonds, which insurers mainly invest in, has recently been moving in the mid-1% range, so the assumed interest rate remains high.

Although loss ratios have improved due to the impact of COVID-19, the profitability of insurers, which mainly invest in bonds under the low interest rate environment, is worsening. According to the Life Insurance Association, the return on assets managed by life insurers, which was 4% in 2015, has fallen to 3.47% in the first half of this year.

In particular, with the impending suspension of sales of non-surrender whole life insurance, there are concerns that sold-out marketing for life insurance products will intensify this month.

Starting next month, an amendment to the Insurance Business Supervisory Regulations will be implemented, requiring the surrender value of non-surrender or low-surrender refund-type insurance to be lowered to within the refund rate of standard insurance. Accordingly, financial authorities plan to continuously monitor sold-out marketing before the enforcement of the Insurance Business Supervisory Regulations and actively respond to signs of incomplete sales or excessive competition.

A life insurance company official advised, "Considering the prolonged low interest rate trend, we have no choice but to respond inevitably through lowering the assumed interest rate," adding, "When purchasing insurance, one should decide carefully based on their purpose of subscription, not on whether sales are being halted."

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