Dollar Insurance with Monthly '$' Payments... Will It Be the First Subject to the 'Geumso Act' Next Month? (Comprehensive)

Insurance Premiums Vary with Exchange Rates
Beware of Consumer Complaints on Incomplete Sales

On the 15th, the KOSPI opened at 3,108.70, up 8.12 points (0.26%) from the previous trading day, as employees were working in the dealing room of Hana Bank in Jung-gu, Seoul. The KOSDAQ opened at 965.83, up 1.52 points (0.16%) from the previous trading day. The won-dollar exchange rate started at 1,105.0 won, down 2.0 won from the previous trading day. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Oh Hyung-gil] Last year, Nosanghyun (29), who joined a dollar variable insurance recommended by an agent to stably secure long-term funds, has recently fallen into a dilemma.

Due to the impact of COVID-19, his salary has decreased this year, and with the rise of the won-dollar exchange rate, the insurance premiums have also increased, causing a heavier burden. His friends around him even scolded him for joining a product that doesn't even allow principal recovery, so he canceled the policy, but the surrender refund was small, and he could not get back the premiums he had paid so far.

There is a growing possibility of disputes among consumers, insurance companies, and sellers regarding dollar insurance, which has recently seen a surge in sales. There are also concerns that dollar insurance will be the first subject to the Financial Consumer Protection Act (FCPA), which will be enforced in about a month.

According to the insurance industry on the 15th, foreign currency insurance, represented by dollar insurance, is a product where both premium payments and insurance payouts are made in foreign currency. The insurer invests the premiums paid by the policyholder in foreign currency mainly in bonds of that currency, and determines the expected interest rate and announced interest rate based on the yield of overseas bonds.

Premiums and insurance payouts fluctuate depending on the exchange rate at the time of conversion to Korean won, and in some products, the maturity refund reserve interest rate is determined based on the yield of the overseas bonds invested in, making the product structure complex.

For example, if the exchange rate rises during the premium payment period, the premiums increase, but if the exchange rate falls at maturity, the insurance payout decreases. Since the premium reserve interest rate changes according to overseas interest rate fluctuations, the maturity refund can also decrease. This means that damages can snowball depending on the timing.

[Image source=Yonhap News]

However, insurance companies are promoting foreign currency insurance sales by emphasizing investment in safe assets like the dollar, compound interest application, and low exchange fees. Until the end of 2019, when the won-dollar exchange rate was stable, six companies, mainly foreign life insurers like MetLife, launched 13 foreign currency insurance products, but sales surged last year as domestic life insurers such as Samsung Life entered the foreign currency insurance market.

Foreign currency insurance premium income increased from 323 billion won in 2017 to 683.2 billion won in 2018, 969 billion won in 2019, and exceeded 1 trillion won cumulatively by the third quarter of last year.

In response, financial authorities issued a consumer warning last year regarding incomplete sales of foreign currency insurance as sales increased.

Especially this year, the Financial Services Commission established a continuous monitoring system for sales practices and complaint status targeting insurers selling foreign currency insurance. They plan to conduct immediate inspections if any abnormal signs occur.

According to the FCPA, which will be enforced on the 25th of next month, financial companies violating six major sales principles such as suitability and appropriateness, explanation obligations, prohibition of unfair sales and improper solicitation, and advertising regulations will be subject to punitive fines. With the introduction of illegal cancellation rights, consumers can request contract cancellation without commission burden.

Some insurance agents introduce foreign currency insurance products on internet blogs as a financial technology tool to realize exchange gains, which is considered a violation of sales principles.

An insurance industry official said, "One of the risk factors of foreign currency insurance is the risk of incomplete sales due to insufficient understanding of the characteristics of foreign currency insurance," adding, "If it is introduced as an exchange tech product or explanations are neglected for seniors over 65, it may violate the FCPA."

Experts advise that since foreign currency insurance has a fixed insurance payout timing, there is no active way to respond to exchange rate fluctuations other than contract cancellation, and caution is needed as the refund amount upon cancellation may be less than the principal.

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