Korea’s financial watchdog to rein in short-term life insurance expediencies

Hanwha Life Corp. headquarters [Photo by Lee Chung-woo]

South Korea’s financial authorities are set to put the brakes on the insurance industry’s frenzied competition for sales of short-term whole life insurance policies as the fierce marketing competition has changed the landscape of the industry in terms of initial premiums.

There were even rumors that Hanwha Life Corp., which expanded its insurance sales organization this year, has surpassed Samsung Life Insurance Co., which had been the No. 1 player for decades.

The Financial Supervisory Service (FSS) said Wednesday that it would “prohibit short-term payment whole life insurance from being designed like savings insurance, such as limiting excessive retention bonus payments.” The financial watchdog raised issue with the practice of some companies selling life insurance policies as high-interest savings accounts by saying they offer “111 percent return after five years.” As the popularity of traditional whole life insurance, which requires payments of 20 years or more, has declined, sales of short-term whole life insurance, which requires payments of only five to seven years, have surged.

According to the FSS and the industry, the share of short-term life insurance sales rose to 41.9 percent in the first half of last year from 8.4 percent in 2019 and is estimated to have exceeded 70 percent in the first half of this year.

“The essence of whole life insurance is coverage after death, but there were concerns about incomplete sales and deterioration of soundness by inducing customers to cancel and switch to other products at the end of the payment period,” said an official from the FSS. “We have taken complementary measures as an increasing number of consumers have complained after signing up under the misconception that it is a high-interest savings plan.”

The authority plans to encourage changes in the insurance plan design by reducing the refund rate to 100 percent or less upon completion of premium payments, with long-term bonuses payable only after 10 years or more.

Insurance companies have been eager to sell short-term whole life insurance because of their monthly premium ranking. Short-term whole life insurance policies require intensive payment of premiums in a short period of time and thus monthly premiums are relatively high. For insurers, this means that they can earn much more premium income within a given timeframe for the same number of policies. That is why they have been pushing hard to sell the short-term policies with generous benefits. The incentives for short-term payment whole life insurance were initially around 300 percent of the monthly premium but rose to over 800 percent in May, according to sources.

The financial authorities recognized the problem and asked the insurance companies to refrain from engaging in excessive competition, and Samsung Life Insurance and others scaled back their incentive offers. However, Hanwha Life maintained its relatively high incentives, significantly narrowing the gap in premium income with its competitors, and ranked first in the industry for the first time in June. Hanwha Life’s strategy of having a very large general agency (GA) organization by launching GA subsidiary Hanwha Life Financial Service Co. and merging with another GA People Life Co. last year is also seen as a driving force behind the expansion of insurance sales.

The FSS plans to tighten controls on short-term payment whole life insurance to prevent its sales from increasing until measures to ban expediencies are implemented.

Meanwhile, non-life insurers’ mis-selling behaviors have also been curbed. The FSS said Wednesday that it will limit the coverage period of driver‘s insurance to a maximum of 20 years.

Previously, there were products that set the insurance period to a maximum of 100 years old, but there were many cases where the very elderly who had difficulty driving paid premiums but did not receive any coverage.