Korean insurers to cut short-term life insurance return rate

[Image source: Pixabay]

South Korean insurers plan to reduce their return rate for short-term life insurance starting in February. This move comes after the country’s financial authorities launched on-site inspections of insurance companies, spurred by concerns over mis-selling amid intense competition among insurers in the short-term life insurance market.

According to insurance industry sources on Monday, Shinhan Life Insurance Co. is considering revising the terms of its short-term life insurance product ‘Shinhan More Deep Dream Whole Life Insurance.’ The company raised the return rate for the product from 130 percent to an industry-leading 135 percent for policies that involve 7 years of payment and 10 years of maintenance on January 15th, 2024. This product is structured to return 135 percent of the paid premiums if the policyholder pays premiums for seven years and terminates the policy after maintaining it for 10 years or more. Shinhan Life plans to lower the return rate in February 2024 and supply the market with the revised product.

Other life insurers, including Hana Life Insurance Co., Hanwha Life Insurance Co., NongHyup Life Insurance Co., and TongYang Life Insurance Co., have also announced plans to stop selling products with excessive return rates. Their plan is to sell existing products with high return rates only until the end of January 2024 and revise the products to sell them with adjusted return rates from February onwards. The companies are expected to supply products with a reduced return rate in the 120 percent range from February.

Fubon Hyundai Life Insurance Co. was the only company offering a 10-year return rate exceeding 130 percent until the second half of 2023, but other insurers followed suit, raising their return rates to 130 percent from the end of that year. The competition to sign contracts intensified among these companies as the impact of securing new contracts on performance grew following the introduction of the new International Financial Reporting Standards (IFRS17) that year.

But concerns are rising that the competition among life insurers to offer higher return rates could increase the possibility of mis-selling due to heated competition and that it could lead to financial instability due to insurers’ deteriorating financial soundness.

In response to these concerns, the Financial Supervisory Service (FSS) launched on-site inspections of Shinhan Life and Kyobo Life on January 22nd, 2024, and is conducting written inspections for other insurance companies.