"People Facing Hardships Increase Loans Before Canceling Insurance"

Source: Korea Insurance Research Institute

[Asia Economy Reporter Changhwan Lee] A study has found that people considering canceling their insurance contracts due to financial difficulties tend to increase their borrowing before surrendering their policies. However, it was also found that they do not reduce their consumption before canceling the insurance.

According to the June 6 report titled "Consumer Credit Activity Behavior and Implications Before Insurance Contract Cancellation" by the Korea Insurance Research Institute, consumers neither increased nor decreased their consumption before canceling insurance contracts but tended to increase small loans prior to cancellation.

The survey results showed that the proportion of consumers whose total loan balance increased at least once compared to the previous month during the six months before insurance contract cancellation was 27.5%, which is 7.8 percentage points (p) higher than the overall average.

The proportion of those whose loan balance under 10 million KRW increased was 7.4%p higher, and for loans over 10 million KRW, it was 3.2%p higher, indicating that consumers tend to increase small loans before cancellation.

By industry sector, consumers who canceled insurance contracts showed a higher rate of increasing loans in the credit card and banking sectors before cancellation, while the increase in loan balances was not significantly higher in sectors such as mutual finance and insurance.

By product type, consumers increased loans mainly in products with relatively short maturities and no collateral requirements, such as cash advances (short-term card loans), card loans (long-term card loans), and personal loans, which allow for simple and fast approval and quick access to cash before canceling insurance contracts.

On the other hand, the proportion of consumers who took out insurance policy loans before cancellation was only 0.1%, which was lower compared to other loan products.

By age group, the difference in the proportion of consumers who increased total loans and bank loans before insurance contract cancellation was higher among those aged 20 and under.

The proportion of consumers aged 20 and under who experienced an increase in total loans during the six months before insurance contract cancellation was 9.0%p higher than the overall average, and for bank sector loans, the difference was 3.5%p.

By product, older age groups tended to increase card loans before canceling insurance contracts, while younger age groups increased personal loans before cancellation, suggesting that older consumers have a higher demand for card loans that can be approved quickly.

In conclusion, the report explained that consumers maintain their consumption before canceling insurance contracts and primarily resolve financial difficulties through new loans before surrendering their policies.

They particularly preferred products with low limits but no collateral and simple approval processes that allow for quick loan execution, such as small loans, card loans, and personal loans.

Additionally, older age groups showed a higher rate of increasing card loans before insurance contract cancellation, while younger age groups showed a higher rate of increasing bank and personal loans.

It appears that older consumers prefer loan products with higher interest rates but quick cash availability due to urgent living expenses, while younger consumers are presumed to prioritize loans with lower interest rates for purposes such as investment funding in addition to living expenses.

Heewoo Park, a research fellow at the Korea Insurance Research Institute, stated, "Consumers tend to increase loans with high interest rates or short maturities before canceling insurance contracts, and if there is no income increase after loan execution, a vicious cycle of worsening household financial conditions and additional insurance contract cancellations may occur."

He added, "Insurance companies need to strengthen guidance on insurance contract maintenance support systems such as insurance policy loans, mid-term withdrawals, and temporary suspension of premium payments, and seek ways to minimize costs that may arise for both consumers and insurance companies due to insurance contract cancellations."

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