Financial Authorities Improve Calculation Standards for Surrender Refunds of No-Refund and Low-Refund Insurance Policies

[Asia Economy Reporter Kim Jin-ho] Financial authorities are improving the system to set the lapse rate and surrender value for no-surrender and low-surrender insurance policies.

The Financial Services Commission announced on the 7th that it has established standards for calculating and verifying the lapse rate of no-surrender and low-surrender insurance policies in collaboration with the insurance industry.

No-surrender and low-surrender insurance policies feature premiums that are 10 to 40% cheaper than regular insurance products, but the surrender value returned to the policyholder upon early termination is either nonexistent or lower than that of regular products. Additionally, if insurers fail to accurately predict the lapse rate and fewer policyholders lapse than expected, the amount of insurance payouts may increase beyond expectations, causing financial risks for the insurer.

Accordingly, the financial authorities have established criteria for calculating lapse rates, such as applying a lower lapse rate when the surrender value level is low and reducing the lapse rate over time during the premium payment period. The "Model Guidelines for Lapse Rate Calculation and Verification" will be announced in advance this year and implemented next year.

To encourage reasonable setting of surrender values, the enforcement rules will also be revised to design the most favorable surrender value structure for consumers under the condition of "same coverage, same premium."

The Insurance Business Act Enforcement Decree and supervisory regulations will also be partially amended to verify the appropriateness of lapse rates. The amendment includes a plan to have the Korea Insurance Development Institute regularly provide insurers with information related to lapse rates. This is to enable insurers to reflect reasonable lapse rates when developing products or calculating the insurance price index for no-surrender and low-surrender insurance policies.

An external verification procedure for lapse rate appropriateness will also be established. The Korea Insurance Development Institute and external actuarial firms will include lapse rates along with risk rates and reserves in the scope of premium adequacy verification.

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