[1mm Finance Talk] Why Life Insurers Are Reluctantly Strengthening 'Savings-Type Insurance'

Proportion of New Protection-Type Insurance Contracts Falls This Year, While Savings-Type Insurance Rises
Life Insurers Increase Single-Premium Sales to Secure Liquidity
Demand for Savings-Type Insurance Grows Amid Ongoing Base Rate Cuts

This year, the proportion of protection-type insurance sales by life insurance companies has dropped to the low 80% range. This is mainly due to a significant increase in the sales of savings-type insurance, driven by the trend of interest rate cuts and efforts by insurers to secure liquidity.

According to the insurance industry on June 5, as of March, protection-type insurance accounted for 81.2% of all new contracts signed by life insurers. This is the lowest figure in one year and one month, since February of last year (80.6%). The proportion of protection-type insurance sales by life insurers has been declining for three consecutive months this year.

Protection-type insurance includes cancer, brain, and heart insurance, as well as whole life and health insurance, and falls under the so-called "third insurance" category, where life insurers compete with non-life insurers. Since the introduction of International Financial Reporting Standards (IFRS17) in 2023, life insurers have been significantly increasing protection-type insurance to secure the Contractual Service Margin (CSM), a key indicator of future profit. As of January last year, protection-type insurance accounted for nearly 90% of new contracts. Even though the proportion of protection-type insurance has decreased this year, the actual sales volume has not declined. In January, KRW 111 billion worth was sold, followed by KRW 111.5 billion in February, and KRW 127.5 billion in March.

Nevertheless, the proportion of protection-type insurance has shrunk because life insurers have greatly increased sales of savings-type insurance. In the first quarter of this year, cumulative new sales of savings-type insurance reached KRW 66.391 billion, a sharp increase of 41.5% compared to the same period last year (KRW 46.928 billion).

It is unusual for life insurers to significantly increase sales of savings-type insurance. Savings-type insurance, including annuity insurance, is recognized as a 'liability' on insurers' balance sheets and does little to contribute to profits, as insurers must pay out the principal plus interest at maturity.

The main reason life insurers have strengthened their focus on savings-type insurance appears to be to secure liquidity. There is a liquidity ratio, which serves as an indicator of an insurer's liquidity. It measures the insurer's ability to pay insurance claims and other payments (such as surrender values, interim payments, and maturity benefits) to policyholders. The ratio is calculated by dividing liquidity assets with a remaining maturity of less than three months by the average amount of insurance payments. At the end of last year, the average liquidity ratio of 22 domestic life insurers was 559%, a sharp drop of 971 percentage points from the previous quarter (1,530%). This was because, at the end of last year, financial authorities reduced the recognition ratio for liquidity assets of risk-free bonds with a remaining maturity of more than three months from 100% to 30%. As this measure was reflected in the year-end financial statements, the liquidity ratio of insurers plummeted.

Life insurers are now focusing on marketing single-premium savings-type insurance to secure liquidity. A representative from a life insurer explained, "Single-premium savings-type insurance, where the entire premium is paid at once, is more advantageous for securing liquidity than monthly premium products, so we have recently increased the refund rate. Large-scale sales are being made mainly through bancassurance channels (insurance sold at banks)."

The trend of base rate cuts is also boosting demand for savings-type insurance. On May 29, the Monetary Policy Board of the Bank of Korea lowered the base rate by 0.25 percentage points to 2.50%. The board also indicated the possibility of further rate cuts in the second half of this year. Another life insurance company representative said, "As interest rates are expected to fall further, more people are putting lump sums into savings-type insurance products with fixed interest rates and refund rates. In addition, if the policy is maintained for more than 10 years, the 15.4% interest income tax is exempted, so we are seeing a surge in inquiries from high-net-worth individuals who are unable to find suitable investment opportunities."