Savings Insurance Crisis... Reasons Behind Insurers' Interest Rate Competition Revealed

Trend of Savings Insurance Payouts by Life Insurance Companies (Source: Korea Institute of Finance)

[Asia Economy Reporter Changhwan Lee] This year, the maturity and surrender amounts of savings-type insurance policies managed by life insurance companies have surged sharply. The reason life insurers are competitively launching high-interest savings-type insurance policies, despite concerns about negative margins, is interpreted as a response to fears that a large outflow of savings insurance funds at once could lead to a liquidity crisis.

According to the Korea Institute of Finance and the Insurance Development Institute as of the end of August, the payout amount for domestic life insurers' savings-type insurance policies reached 24 trillion won, a 33% increase compared to 18 trillion won during the same period last year. The surrender amount for savings-type insurance also expanded by 26.3% year-on-year to 14 trillion won.

Savings-type insurance is similar to bank fixed deposits or installment savings but combines characteristics of insurance products such as death benefits. If the policyholder dies before maturity, the accumulated reserves are returned with additional compensation.

Most of the savings-type insurance policies maturing this year are understood to have been sold about 10 years ago. Life insurers focused on selling relatively high-interest savings-type insurance in the early 2010s as the low-interest rate trend persisted.

With intensified promotions, savings-type insurance experienced high growth of 20-30% from 2008 to 2011, and especially in 2012, when the tax benefits for savings-type insurance were extended from 7 years to 10 years, demand surged before the system change, increasing by 57.5% compared to the previous year.

Since savings-type insurance must be maintained for more than 10 years to receive tax-exempt insurance gains, the maturity and surrender of products reaching their 10th year this year have surged. Additionally, as banks rapidly raised deposit interest rates, more customers are withdrawing funds from savings-type insurance to move money to banks.

The problem is that with the sharp rise in interest rates this year worsening insurers' financial soundness, the increase in savings-type insurance surrenders is further deteriorating insurers' liquidity conditions.

In fact, as of the second quarter, the average liquidity ratio of life insurers was 195%, down 75 percentage points (p) from the same period last year, and that of non-life insurers was 182%, down 27 p. Some insurers have liquidity ratios below 100%. To improve liquidity, capital expansion is necessary, but the bond market has shrunk due to incidents like Legoland and Heungkuk Life, making bond issuance difficult.

Accordingly, insurers are consecutively launching high-interest savings-type insurance policies to attract new funds. Kyobo Life Insurance launched a 5-year maturity savings-type insurance with a fixed interest rate of 5.8% last week. Fubon Hyundai Life is also scheduled to release a savings-type insurance with a 5.9% interest rate on the 25th. Hanwha Life (5.7%), ABL Life (5.4%), and IBK Pension Insurance (5.3%) have also recently launched high-interest savings-type insurance policies.

However, the industry views that the higher the interest rates on insurers' savings-type insurance, the greater the concern over negative margins. Insurers must operate premiums to pay interest to customers, but if interest rates fall in the future, it may become difficult to generate profits. Financial authorities are also known to have indirectly and directly conveyed concerns about excessive competition in savings-type insurance to insurers.

An insurance industry official said, "Insurers are aware of the negative margin concerns but are launching high-interest savings-type insurance due to the risk of liquidity depletion."

Senior Research Fellow Seokho Lee of the Korea Institute of Finance explained, "Due to increased insurance payout demands for savings-type insurance sold in the past, decreased new subscriptions, increased surrenders of existing contracts, and expanded financial market instability, there is a possibility that insurers' liquidity conditions will worsen in the future."