Beware of 'Jeolpan Marketing' Before Insurance Premiums Rise

[Asia Economy Reporter Oh Hyung-gil] As insurance companies have announced a reduction in the assumed interest rate for April, insurance premiums are expected to rise. Some insurers are advancing the timing of the assumed interest rate cut to the end of this month or within March, which is expected to accelerate the premium increase. Accordingly, there is a risk that aggressive sales marketing urging consumers to sign up before premiums rise may become widespread, requiring consumer caution.

According to the insurance industry on the 25th, Samsung Life Insurance has lowered the assumed interest rate for some products starting this month, and plans to uniformly reduce the assumed interest rate for its main whole life insurance products from April 1. The reduction is 0.25 percentage points.

Kyobo Life Insurance is also considering a 0.25 percentage point cut in the assumed interest rate, with the timing set for April. Hanwha Life Insurance and NH Nonghyup Life Insurance are also reportedly reviewing reductions in the assumed interest rate.

This will be the first average assumed interest rate cut by life insurers in three years, from 3.0% in 2017 to 2.50% in 2018. The assumed interest rate refers to the expected rate of return that can be earned by managing the premiums received from customers until the insurance benefits are paid. When the assumed interest rate decreases, meaning the expected return is expected to decline, insurers respond by raising premiums or reducing coverage.

Generally, an increase in the assumed interest rate means lower premiums, and a decrease means premiums will rise. If the assumed interest rate drops by 0.25 percentage points, premiums are typically expected to increase by up to 8%. However, interest rate-linked products such as pensions or savings-type insurance are excluded from premium hikes.

In particular, with the spread of the novel coronavirus disease (COVID-19), there are expectations that the base interest rate will be lowered, raising the possibility of further cuts to the assumed interest rate. As the number of confirmed cases in Korea rapidly increases due to community transmission of COVID-19, there is growing consensus that a rate cut decision at the Monetary Policy Committee meeting on the 27th has become inevitable.

Insurance companies mainly invest heavily in bonds, and as interest rates fall, bond yields are also declining. The average yield on 10-year government bonds in December 2019 was 1.65%, nearly 1 percentage point lower than the 2.50% average in 2018. This implies increased pressure to lower the assumed interest rate.

Given this situation, the insurance industry is already anticipating premium increases and product benefit adjustments due to assumed interest rate cuts and rising loss ratios, with signs of 'clearance marketing' emerging for whole life and health insurance products. Starting with small and medium-sized insurers, most companies are expected to engage in clearance marketing. From the consumer perspective, there is an advantage in being able to purchase products under favorable conditions, but it is important to carefully select products that suit their needs.

An industry insider said, "Since each insurer adjusts loss ratios differently, actual premiums may vary somewhat by company," adding, "Consumers should verify the coverage details and payout amounts they need, as they may be tempted to purchase unnecessary products due to rumors of premium increases."