Loan Gate Closed... Regulations' 'Blind Spot' Leads to Insurance Policy Loans Rush

3Q Insurance Companies' Policy Loan Balance Increases by 600 Billion
Clear Growth Trend Since 2Q This Year When Loan Freeze Began

[Asia Economy Reporter Kim Jin-ho] The increase in insurance policy loans (contract loans) by insurance companies, known as "livelihood loans," has recently accelerated. This is analyzed as a so-called balloon effect, where demand is concentrated in a regulatory "blind spot" as banks and mutual finance institutions successively close their lending doors. The prolonged COVID-19 pandemic and resulting financial hardships are also cited as causes.

According to statistics from the Financial Supervisory Service as of the end of September, the outstanding balance of insurance policy loans stood at 64.4 trillion KRW, an increase of 600 billion KRW compared to the previous quarter.

The outstanding balance of insurance policy loans had been steadily declining from 65.1 trillion KRW at the end of 2019 to 63.5 trillion KRW at the end of last year. However, the upward trend has become clear since the second quarter of this year, when the credit crunch due to total volume regulations began in earnest.

Policy loans are products where the policyholder can borrow money from the insurance company using the paid insurance premiums as collateral. Borrowers can take out loans up to 70-80% of the policy surrender value, and repayment is flexible. Since the insurance itself serves as collateral, loans can be granted without separate screening. Thanks to this convenience, policy loans account for half of the total household loans held by insurance companies.

The recent clear increase in policy loans, which had been declining last year, is attributed to the balloon effect caused by total volume regulations. Policy loans are not included in total volume regulations and are also exempt from the Debt Service Ratio (DSR) application. In other words, they exist in a regulatory blind spot.

Therefore, it is analyzed that demand for urgent funds amid the credit crunch has concentrated on policy loans. A financial industry official said, "The difficulty in obtaining loans this year due to comprehensive regulations likely influenced this trend," adding, "Since policy loans are easy to execute and their purpose is hard to verify, they are highly likely to be used as means for 'Yeongkkeul' (borrowing to the limit) or 'Debt Investment'."

The prolonged COVID-19 crisis has also increased vulnerable groups such as small business owners and the elderly facing livelihood difficulties. According to data submitted by the Financial Supervisory Service to Rep. Jeon Jae-su of the Democratic Party, the outstanding balance of policy loans for those aged 60 and over was 13.2481 trillion KRW as of the end of the second quarter, an increase of 519.6 billion KRW compared to 12.7285 trillion KRW at the end of last year.

Policy loans are expected to continue their upward trend for the time being. This is because major insurance companies have recently lowered policy loan interest rates despite the rising interest rate environment. The fixed-rate policy loan interest rates of major insurers average around 6-8%. Although the rates are high considering the collateralized nature of the loans, many people in urgent need of funds prefer them because they can borrow money easily without separate screening. The possibility of demand that could not cross the loan thresholds of other financial institutions concentrating on policy loans has increased.

Meanwhile, financial authorities are closely monitoring the increase in policy loans. A financial authority official said, "We are continuously monitoring the implementation status of insurance companies' household loan management and loan soundness indicators."

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