Variable Insurance Sales Surge in the 'KOSPI 3400' Era... High Cancellation Rate Remains a Challenge

Variable Insurance Gains Popularity Amid Bullish Domestic and Global Stock Markets
77,791 New Variable Insurance Contracts Signed from January to July, Up 22.6% Year-on-Year
High Cancellation Rate of 34.8% for Contracts Under Five Years... Risk of P

With the KOSPI surpassing 3,400 for the first time in history and a bullish stock market, variable insurance products are also gaining popularity. However, due to the possibility of principal loss and insurance companies’ lack of expertise in product design and management, the cancellation rate remains high, warranting caution.

According to statistics from the Korea Life Insurance Association on September 16, the number of new variable insurance contracts (both protection-type and savings-type) from January to July this year reached 77,791, up 22.6% from the same period last year. As new contracts increased, initial premiums also rose. In the first half of this year, initial premiums for variable insurance totaled 1.3828 trillion won, a sharp increase of 64.7% compared to 839.5 billion won in the same period last year. Variable insurance is a product in which a portion of the premiums paid by policyholders is invested in stocks, bonds, or funds, and the pension or refund amount varies depending on investment performance.

The surge in interest in variable insurance this year is largely due to rising domestic and global stock prices. On the previous day, the KOSPI surpassed the 3,400 mark for the first time in the history of the Korean stock market. Since the beginning of the year, the index has risen by about 42%. During the same period, the Nasdaq index also increased by 15%, reflecting the generally positive sentiment in global stock markets.

As of the previous day, the domestic equity funds invested in by variable insurance products posted strong returns. BNP Paribas Cardif Life Insurance’s “1.5 Leverage Index Indirect Type” recorded a return of 61.8%, ranking first. Other funds invested in by the company’s variable insurance products, such as the “Eco-friendly Energy Active ETF Indirect Type” (61.6%), “Value Equity Fund” (55.8%), and “Momentum ETF Indirect Type” (54.4%), also ranked in the top two to four spots for returns. The ranking remained the same even when the scope was expanded to include both domestic and international funds, underscoring the stronger rally in the Korean stock market compared to other countries.

Variable insurance can offer higher returns at maturity than traditional insurance if investment performance is strong. However, if performance is poor, there is a risk of principal loss, so caution is needed. The investment ratio and expense structure vary by product, so even with the same premium, returns may differ. Premiums collected by insurance companies through variable insurance are broadly divided into savings premiums, risk premiums, and business expenses, but only the savings premiums are actually invested. For variable whole life insurance, where death coverage is the main purpose, the proportion of business expenses and risk premiums is high, resulting in lower refunds upon cancellation. If variable insurance is canceled within 10 years, a 15.4% interest income tax must also be paid.

Variable insurance products tend to have a high cancellation rate in the early stages of the contract. According to data submitted by Heo Young, a member of the Democratic Party, from the Financial Supervisory Service, as of the first half of this year, 34.8% of cancellations of savings-type variable insurance at the top nine life insurers by asset size (excluding NH NongHyup Life Insurance) involved contracts less than five years old. This contrasts with the public image of these products as long-term retirement savings vehicles.

The refund rate was also low. The average refund rate for contracts less than five years old was 104.9%, but this was identified as a special case due to the recent strong performance of underlying assets such as U.S. stocks. For contracts maintained for more than 10 years, the refund rate was 102.1%, effectively returning only the principal. Considering the cumulative inflation rate of about 20% during the same period, the real value actually decreased. Given that the expected refund rate for general savings insurance currently on the market ranges from 103% to 127%, the potential for high returns from variable insurance is limited. Assemblyman Heo stated, “The main reasons for the poor performance of variable insurance are high-cost, low-efficiency fund composition, lack of product design expertise by insurers, and insufficient education and information provided to consumers,” adding, “Financial authorities must thoroughly review these issues.”