Short-Term Lump-Sum Whole Life Insurance Sales Competition 'Overheated'
Long-Term Product Cancellation Rates Applied to Short-Term Products
Performance May Shrink Due to Future Budget-Actual Differences
Life insurance companies are aggressively promoting whole life insurance policies with short payment periods by offering huge commissions to insurance agents. The excessive sales have even prompted authorities to step in and impose restrictions. There are concerns that this sales strategy could become a 'poison' for life insurers in the future. This is due to worries that if the assumed lapse rates used to reflect sales performance under the new accounting standards differ from the actual lapse rates, the results could be significantly reduced.
According to the insurance industry on the 27th, life insurers have recently focused on selling short-payment whole life insurance policies. As it became difficult to sell whole life insurance with payment periods of 20 to 30 years, they developed and sold short-payment products with payment periods reduced to 5 to 7 years, guaranteeing a refund rate of over 100% once the payment period is completed.
In particular, major life insurers such as Samsung Life and Hanwha Life have competed by offering high incentives (performance bonuses separate from product sales commissions) to insurance agents. Some insurers offered incentives amounting to 14 times the customer's monthly premium. The competition became so overheated that some agents engaged in incomplete sales practices by introducing short-payment whole life insurance as if it were a savings insurance. They promoted it by emphasizing a refund rate of about 107%, claiming it was higher than bank interest rates.
Insurers' focus on short-payment whole life insurance is advantageous both for market penetration and for improving accounting performance. Compared to long-term whole life insurance, which has seen reduced demand due to improved mortality rates and an increase in single-person households, the shorter payment period makes it easier to target the MZ (Millennial + Z) generation, who are reluctant to commit to long-term insurance. It is also favorable for securing the insurance contract service margin (CSM), a profitability indicator under the new accounting standard (IFRS17). As a protection-type insurance, it is classified as an asset and can manage performance more stably than savings-type insurance, which is more affected by interest rate fluctuations.
However, there are concerns that the sale of short-payment whole life products could become a 'boomerang' later on. The CSM is a concept that recognizes future profits generated from insurance contracts over several years. Various assumptions are applied when amortizing future profits, including the frequency of coverage risk occurrence, recurrence, and lapse rates. Since insurers have limited sales history for short-payment products, they have applied lapse rates from existing long-term whole life insurance. If the actual lapse rates are higher than expected, the profits to be amortized later will inevitably decrease. Recently, the Financial Supervisory Service provided guidelines on various accounting (actuarial) assumptions under IFRS17, but most pertain only to lapse rates for indemnity medical insurance or no/low lapse insurance.
An industry insider said, "There may be a temptation to overestimate immediate profits, but if unreasonable assumptions are made, it will ultimately result in poor performance later under IFRS17," adding, "While the foundation of the new accounting standard is autonomy, the authorities need to establish at least minimum standards instead of leaving it entirely to the market."
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