Following Interest Rate Cuts, Accounting Standards Also Improved... Decline in Refund Rates for 'Short-Term Lump Sum Whole Life'

Samsung and Hanwha Followed by Kyobo Life Insurance Product Revision
7-Year Payment and 10-Year Retention Refund Rate Expected to Exceed 110%
"A Proactive Approach to Managing Profitability"

As the base interest rate cuts and improvements to the International Financial Reporting Standards (IFRS17) coincide, the craze for 'short-term payment whole life insurance,' which was popular earlier this year, is rapidly cooling down. Meanwhile, major life insurance companies are beginning to lower refund rates, with 7-year payment and 10-year retention refund rates retreating to the 110% range.

According to a comprehensive report by Asia Economy on the 21st, Kyobo Life Insurance confirmed that it will lower the 7-year payment 10-year refund rate of its short-term payment whole life insurance product, 'Practical Easy Enrollment Whole Life Insurance Plus,' to the high 110% range early next month. The current refund rate for this product is 122.1%.

Earlier, Samsung Life Insurance revised its short-term payment whole life insurance product, 'The Happiness Whole Life Insurance,' on the 6th, lowering the 7-year payment 10-year refund rate from the previous 122.3% to 119.2%. Hanwha Life Insurance decided to maintain only the 5-year payment option in its 'H3 Whole Life Insurance' product lineup starting from the 1st, discontinuing the 7- and 10-year payment options.

Short-term payment whole life insurance products have a short payment period of about 5 to 7 years but offer a refund rate exceeding 100% at the 10-year mark by including bonuses and other incentives. Earlier this year, overheated competition among life insurers led even major companies to offer high incentives (additional performance bonuses separate from product sales commissions) to insurance planners, pushing refund rates up to a maximum of 136%. In response, financial authorities, concerned about incomplete sales and insurer soundness, intervened to curb excessive sales.

The move by major companies to lower refund rates or discontinue sales of short-term payment whole life insurance is interpreted as a proactive profitability management measure. When the base interest rate is lowered, it becomes difficult to expect investment returns on premiums, prompting a reduction in refund amounts. The lower the interest rate, the harder it is for life insurers to offer refund rates in the 120% range.

Another reason for revising short-term payment whole life insurance is the increasing burden of funding costs. Additionally, with the recent announcement of IFRS17 improvements by financial authorities, insurers are actively raising capital. Since the speed of liability growth outpaces asset growth during a base interest rate cut, a decline in the solvency ratio (K-ICS) is expected. The Korea Insurance Research Institute estimates that a 1 percentage point drop in the base interest rate would reduce life insurers' K-ICS by 25 percentage points. Furthermore, the financial authorities predict that applying strengthened assumptions on surrender rates for no- and low-surrender insurance under the IFRS17 improvements will lower the average K-ICS across insurers by about 20 percentage points compared to the end of the first half of this year (217.3%).

K-ICS is an indicator showing whether an insurer can pay insurance claims on time. If K-ICS is expected to fall, insurers can defend themselves by issuing new capital securities or subordinated bonds. The Financial Supervisory Service recommends that insurers maintain K-ICS above 150%. If K-ICS falls below 100%, management improvement orders and possible expulsion measures can be imposed.

There is also analysis that the profitability of short-term payment whole life insurance has declined due to excessive refund rate competition continuing since last year. The burden of various costs such as incentives and marketing has increased, and the financial authorities' refund rate restrictions have slowed business growth. For example, Samsung Life Insurance's death benefit insurance contract margin (CSM) multiple dropped from 13.1 times in the third quarter of last year to 7.6 times in the third quarter of this year. This multiple is calculated by dividing the new contract CSM by the monthly premium equivalent first-year premium; the higher the multiple, the greater the profit for the same premium.

A financial authority official said, "Insurers anticipating base interest rate cuts may lower refund rates on short-term payment whole life insurance. Since increasing premiums to return insurance money is the basic profit structure of the insurance sector, they may try to reduce refunds when investment returns decline due to lower interest rates."

An insurance industry official stated, "Due to complex reasons such as interest rate cuts and IFRS17 improvements, the high refund rates of current short-term payment whole life insurance are expected to continue deteriorating insurers' profitability. Currently, there is a trend to focus on relatively more profitable health insurance."