'Dollar Insurance' Facing Expulsion Risk... Improvement Plan to Be Announced Next Month

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] Financial authorities have reportedly shifted their stance to strengthen internal management, such as preventing incomplete sales, instead of imposing sales regulations on dollar insurance.

According to the insurance industry on the 24th, the Financial Services Commission plans to announce next month an improvement plan for managing foreign currency insurance, including dollar insurance, focusing on preventing incomplete sales and curbing excessive fees.

Foreign currency insurance is a protection-type product with the same structure as won-denominated insurance, but premiums and payments are made based on foreign currencies such as the US dollar.

As demand for foreign currency investments surged in the low-interest-rate era, the number of foreign currency insurance policyholders rapidly increased from 14,475 in 2017 to 165,746 last year.

When the dollar strengthens sharply at the time of receiving insurance benefits, the amount received in won increases, but there is an inherent risk of exchange rate fluctuations that reduce the insurance payout if the dollar value plummets.

For this reason, insurance companies have sold foreign currency insurance to customers with foreign currency needs such as overseas travel, studying abroad, and immigration.

However, as foreign currency insurance sales surged, concerns arose that the 'KIKO' foreign exchange derivative product incident, which caused victims due to exchange rate fluctuations, might recur, prompting the preparation of improvement measures.

Accordingly, they proposed to the insurance industry to limit foreign currency insurance subscribers in principle to 'real demanders' of dollar insurance benefits, such as dollar earners, and to have insurance companies bear exchange losses by employing means such as currency hedging (exchange rate risk avoidance).

However, the insurance industry opposed, stating that there are no suitable hedging products in the market for insurance products with subscription periods lasting decades, and that the cost of compensating exchange losses cannot be predicted.

Ultimately, financial authorities reportedly decided tentatively not to pursue subscriber restrictions and exchange loss compensation, reflecting the industry's public opinion.

The insurance industry expressed relief but also voiced regret that an excessive sales regulation was attempted without considering the unique characteristics of foreign currency insurance, which is subscribed to and paid out in foreign currency.

An insurance industry official said, "Since the leadership change at the Financial Services Commission and the Financial Supervisory Service, the trend regarding dollar insurance regulation has changed," adding, "It seems they shifted the policy to accept the industry's opinions and prevent consumer damage rather than killing foreign currency insurance in the market."