Savings Insurance Sold 21 Trillion Won in First Half... Will the Interest Rate Reflection Effect Disappear? (Comprehensive)

Additional Interest Rate Hike Expected Within the Year
Situation Where Interest Rate Effects Cannot Be Expected
Introduction of New International Accounting Standards Also a Hindrance

[Asia Economy Reporter Oh Hyung-gil] Savings-type insurance policies, which had benefited from the prolonged low-interest-rate environment and the private equity fund crisis, are once again facing neglect.

With an additional base rate hike expected within the year, bank deposit and savings interest rates are also rising, making it difficult to expect a relative interest rate advantage. From the insurers' perspective, the new International Financial Reporting Standard (IFRS17) introduced in 2023 recognizes most savings-type insurance as liabilities, limiting their ability to increase subscriptions to these policies.

According to the insurance industry on the 15th, as of September, the announced interest rates for savings-type insurance policies by life insurance companies ranged from 2.10% to 2.41%, showing a decline compared to 2.17% to 2.44% at the beginning of this year.

The announced interest rate, linked to market interest rates, represents the interest rate paid to customers. Insurers adjust the announced interest rate monthly; when market interest rates fall, they lower the announced rate to minimize losses. Most of the savings-type insurance products currently sold are interest rate-linked, so if the announced interest rate drops, the maturity refund decreases accordingly, potentially causing losses for policyholders.

By insurer, MetLife Life Insurance had the highest rate at 2.41%. Kyobo Life and Heungkuk Life each recorded 2.26%, Samsung Life and ABL Life each had 2.25%, while Shinhan Life was relatively lower at 2.10% compared to other life insurers.

Recently, with the emergence of 2% range fixed deposits at savings banks, the trend of rising interest rates on bank deposit and savings products is expected to continue. According to the Korea Federation of Savings Banks, as of September, the average interest rate for one-year fixed deposits at domestic savings banks was 2.18% per annum, up 0.28 percentage points from the end of last year. This is 1.08 percentage points higher than the average one-year fixed deposit rate (1.10% per annum) at banks in July.

Internet-only banks are also raising rates. Toss Bank, the third internet-only bank in Korea launching early next month, is currently accepting pre-registrations for demand deposit accounts that pay 2% interest annually with no restrictions on the subscription period. Kakao Bank also raised its basic interest rates on new deposit and savings accounts by 0.3 to 0.4 percentage points starting from the 9th.

If the interest rate gap between savings-type insurance and deposit/savings products narrows further, it is expected to negatively impact the previously strong sales of savings-type insurance.

In the first half of this year, new contract amounts for savings-type insurance by life insurers surged by 34.0% to 21.2089 trillion KRW compared to 15.8253 trillion KRW in the same period last year. In contrast, new contracts for protection-type insurance decreased by 4.4%, from 140.9221 trillion KRW to 134.6129 trillion KRW during the same period, showing a divergence. Considering that savings-type insurance excludes business expenses unlike deposits and savings, this could also lead to policy cancellations.

Insurers are also in a difficult position to actively promote savings-type insurance sales. IFRS17 changes the insurance liability valuation method from the current cost basis to fair value, requiring future insurance payments to be discounted to present value using current interest rates.

Savings-type insurance, which guarantees future insurance payments, becomes a liability burden rather than a source of profit. For this reason, insurers have pursued a strategy of reducing savings-type insurance sales while increasing protection-type insurance.

New contract amounts for savings-type insurance steadily declined from 56.4482 trillion KRW in 2016 to 49.4278 trillion KRW in 2017, then to 35.9062 trillion KRW in 2018, and further down to 30.6406 trillion KRW in 2019.

A life insurance industry official said, "Even if deposit and savings interest rates rise, the advantages of savings-type insurance, such as the ability to save at a high interest rate over a long period and the compound interest effect on interest, remain," but added, "However, if a profit above the principal is achieved, some may surrender early depending on the yield."

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