Why Life Insurers Aren't Smiling Despite a 15 Percentage Point Rise in 'Policy Retention Rate' Ordered by Regulators

Despite having significantly improved their insurance contract retention rates over the past two years, life insurance companies are warning against complacency, characterizing the gains as a "temporary illusion." They attribute these results to a rise in the sale of protection-type insurance products, such as short-term payment whole life policies, which are less sensitive to cancellations and have strong customer retention regardless of economic conditions. Although life insurers demonstrated resilience in face-to-face sales even during the COVID-19 pandemic, they are also emphasizing the need for vigilance against market disturbances caused by improper policy replacements by insurance planners.

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According to Korea Ratings on April 15, the 13th month contract retention rate (contracts maintained after 1 year and 1 month) in the life insurance industry rose steadily from 83.2% at the end of 2023 to 88.2% in 2024 and 88.5% in 2025. The 25th month retention rate (contracts maintained after 2 years and 1 month) also surged from 60.7% to 68.9% and then 76.0% over the same period-a sharp increase of 15.3 percentage points in two years. In contrast, non-life insurers’ 13th (mid-86%) and 25th month (mid-70%) retention rates remained relatively stable with little fluctuation.

The life insurance sector’s ability to sharply improve retention rates is largely attributed to aggressive expansion of face-to-face sales for protection-type insurance. According to Financial Supervisory Service statistics, life insurers’ face-to-face channel premium income jumped from 14.5115 trillion won in 2021 to 23.7387 trillion won in 2022. Although it dipped to 14.6594 trillion won in 2023, it rebounded to 23.0094 trillion won last year. Since the 13th and 25th month retention rates are indicators for contracts signed 1 to 2 years earlier, these numbers suggest that even during periods of volatility in short-term payment whole life policy sales, improper policy replacements were effectively controlled, resulting in stable retention.

An industry insider explained, "After the introduction of the new International Financial Reporting Standards (IFRS17) in 2023, life insurers restructured their portfolios toward protection-type products with higher profitability and soundness, moving away from savings-type insurance. Unlike savings products, which are highly sensitive to cancellations, health and whole life insurance tend to be maintained for the long term, and insurers have actively leveraged these characteristics to improve retention rates."

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Stricter regulatory measures on arbitrage trading by authorities have also contributed to the improved retention rates. Arbitrage trading refers to situations where the sum of cancellation fees and surrender values upon policy termination exceeds the total premiums paid. Some exploited this by engaging in improper transactions that took advantage of higher surrender values and fees compared to premiums paid. In response, the financial authorities amended the Insurance Business Supervision Regulation in January, extending the ban on arbitrage trading in the third insurance sector from 2 years to 3 years, and the revised regulation has been in effect since last month. Following this change, there has reportedly been a decline in problematic policy cancellations and substandard contracts in the insurance recruitment market.

Another industry insider commented, "The strong regulatory stance on arbitrage trading signaled by authorities since 2023 was a timely measure that directly resulted in fewer policy cancellations and higher retention rates."

Additionally, the reinforcement of exclusive planner organizations by primary insurers since 2023 has also been positive. According to the Financial Supervisory Service, the number of exclusive insurance planners rose by 32.6%, from 162,142 in 2023 to 215,009 last year. As the "1200% Rule"-a commission cap regulation-is set to be expanded to corporate insurance agencies (GAs) starting this July, the trend toward strengthening highly skilled exclusive planner workforces is expected to continue, contributing to a more stable sales environment.

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However, life insurers remain vigilant even as retention rates soar. They caution that the current figures may be a temporary effect of the surge in short-term payment whole life policy sales before and after the adoption of IFRS17. These products are structured so that customers incur significant losses if canceled within five years, resulting in artificially high initial retention rates.

Some observers point out that the unique circumstances of the COVID-19 pandemic, such as a contraction in face-to-face sales channels, paradoxically led to higher retention rates. Practices in some channels, like GAs, where planners without sufficient expertise would focus on high commissions and encourage improper policy replacements, or excessively aggressive recruitment competition, were dampened by pandemic-related social distancing measures. This resulted in "reflexive benefits" that temporarily improved retention rates. Recent figures may simply reflect a temporary lull in chronic issues within the insurance market.

An industry representative emphasized, "Lasting reforms, such as the overhaul of commission structures for GA planners taking effect this July, must be fully entrenched in the market to break the cycle of improper policy replacements and excessive recruitment. Only when both the industry and regulators achieve this can we say that the insurance market has undergone true reform-beyond a mere uptick in statistics."

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