[Reporter’s Notebook] Repeated Scarcity Marketing in Insurance: Authorities Also to Blame

Scarcity marketing is once again rampant in the insurance industry. When a new insurance product becomes popular, financial authorities hint at sanctions, and panicked insurance agents urge customers to sign up by saying "today is the last chance." Similar insurance products are launched and disappear repeatedly, almost daily, like fly-by-night operations. Since this kind of business is profitable, everyone jumps in, intensifying competition among life and non-life insurers.

The problem with scarcity marketing is that it increases the possibility of incomplete sales. When customers try to carefully check complex products, riders, and contract information over several days, coverage often changes quickly. Fearing that the product they were interested in will soon disappear, they sometimes buy insurance without fully understanding the product details. If scarcity marketing runs rampant, there is no guarantee that incidents like the Hong Kong H-Index equity-linked securities (ELS) crisis will not occur in the insurance sector as well.

While industry self-reflection is needed regarding scarcity marketing, fundamentally, the financial authorities bear greater responsibility. Looking at cases where scarcity marketing flourished over the past few years, many were sparked by the authorities’ reactive, piecemeal regulations. A representative example is the "short-term payment whole life insurance," which recently gained popularity due to its high refund rate exceeding 130%. In July last year, the Financial Supervisory Service (FSS) restricted the early surrender refund rates for 5- and 7-year maturities of this insurance to not exceed 100% to curb overheated competition. Subsequently, insurers extended the maturity to 10 years and raised the surrender refund rate to over 130%. Regulations that simply dictate numbers without considering industry circumstances or insurer characteristics ironically provided insurers with an excuse for scarcity marketing.

The overheated competition for short-term payment whole life insurance was a foreseeable issue since the introduction of the new International Financial Reporting Standard (IFRS 17) last year. Concerns that short-term payment whole life insurance, a protection-type insurance, would be advantageous for securing the newly introduced profit indicator under IFRS 17, the Contractual Service Margin (CSM), and could cause various side effects have become reality. The tax exemption benefits that encouraged scarcity marketing of short-term payment whole life insurance were also a result of the Ministry of Economy and Finance’s careless revision of the Income Tax Act Enforcement Rules in 2017. There are many other side effects caused by shortsighted policy implementation.

Recently, as overheated competition emerged with insurance benefits for single rooms in tertiary hospitals soaring to 600,000 KRW per day, financial authorities hinted at sanctions. As expected, scarcity marketing is rampant on the front lines, with claims that products will soon disappear. One life insurer even announced it would sell a product guaranteeing up to 500,000 KRW per day for not only single rooms but also 2- to 6-person rooms until the end of this month. There are concerns that moral hazard might arise, unnecessarily extending hospital stays amid an already chaotic medical environment.

We hope the financial authorities are not deliberating on how much coverage to set for this product. Instead of chasing individual products any longer, fundamental measures must be introduced. Should the financial authorities be known as the number one sales agent for insurers?

Financial Supervisory Service building.