Variable Insurance Directly Hit by Stock Market Shock

[Asia Economy Reporter Changhwan Lee] As the domestic stock market has continuously declined this year, the number of variable insurance subscribers has also significantly decreased. With the stock market expected to remain weak for a considerable period, insurance companies are facing deep concerns.

According to the Life Insurance Association on the 22nd, the initial premium for domestic variable insurance in March was 481.3 billion KRW, down to about one-third compared to 1.5867 trillion KRW recorded in the same period last year. The initial premium refers to the first premium paid by customers after subscribing to insurance and indicates the growth potential of insurance products.

During the same period, the total assets of variable insurance decreased by about 6 trillion KRW, from 118.4379 trillion KRW to 112.3032 trillion KRW. It is reported that variable insurance sales recorded a similar level of decline in the second quarter as well.

The sluggish sales of variable insurance are due to the significant decline in the domestic stock market this year. The KOSPI index has dropped more than 20%, from around 3000 at the beginning of the year to the 2300 range recently.

Variable insurance is structured so that part of the premiums paid is invested in stocks or bonds to generate returns, which then provide benefits. However, as the stock market declines, concerns about worsening profitability have increased. When the stock market performs well, the insurance payout can exceed the premiums paid, but when the market performs poorly, losses may occur.

Following the significant rise in the domestic stock market after COVID-19, variable insurance was very popular until last year. The number of new variable insurance contracts in the first quarter of 2020, before the COVID-19 outbreak, was about 60,000, but it reached 120,000 in the first quarter of 2021. Life insurance companies also strengthened marketing of variable insurance products, benefiting from the stock market boom, which greatly increased insurance sales.

However, as the stock market sentiment worsened this year, the number of new contracts dropped back to about 60,000. The returns on variable insurance sold by life insurance companies also deteriorated. Major insurers such as Mirae Asset Life, DGB Life, Hanwha Life, and Shinhan Life recorded declines of around minus 5% in variable insurance returns this year.

It is also problematic that there are forecasts suggesting it will be difficult for the stock market to rebound this year. As market sentiment worsens, insurance companies are becoming increasingly concerned. A representative from a life insurance company said, "When the stock market deteriorates, the sales of variable insurance inevitably shrink," adding, "There is a trend to focus on products that can replace variable insurance."

However, there are concerns that canceling variable insurance immediately due to poor returns could actually cause more losses to subscribers. Variable insurance is structured for long-term investment of at least 5 to 10 years to generate profits, and canceling before that period can damage the principal.

An insurance company official explained, "Since variable insurance is designed for long-term investment, canceling due to poor short-term returns can actually result in losses, so caution is needed."