[1mm Finance Talk] "Narrow the Asset-Liability Gap"... Why Insurance Companies Are Rolling Out Renewable Health Insurance Products Consecutively

Major Insurers Launch New Renewable Health Insurance Products on September 1
Discount Benefits Offered for Choosing "Renewable" Options
Full-Scale Efforts in Asset-Liability Management to Reduce Interest Rate Sensitivity

Major domestic insurance companies are consecutively launching renewable health insurance products. This move is interpreted as a portfolio adjustment in response to financial authorities cracking down on the 'duration gap,' which represents the difference in maturity between insurers' assets and liabilities.

According to the financial sector on September 4, Tongyang Life Insurance released two renewable health insurance products, including the '(Non-Participating) Woori WON Health Insurance,' on September 1. These products offer a total of 102 detailed riders, including 71 types of coverage for the entire process from diagnosis to treatment, surgery, hospitalization, and outpatient care for cancer, brain, and heart diseases, 27 types of disease and accident coverage, and 4 other types.

Mirae Asset Life Insurance also introduced the 'M-Care Health Insurance,' a simplified underwriting renewable product, on the same day. This product targets customers with pre-existing conditions who have difficulty enrolling in standard insurance policies. After launching the '3.10.5 Simplified Underwriting Non-Renewable' product in July, the company has now expanded its lineup to include renewable options. The product includes over 110 types of riders, covering not only core benefits such as accident death, cancer, brain, and heart diseases, but also nursing care, hospitalization, surgery, disability, and anti-cancer treatment.

Heungkuk Life Insurance also launched the '3.10.5.5 Godang Plus Simplified Health Insurance (No Surrender Value Type V2)' on the same day. This product was designed to lower premiums by adding new disclosure items for hypertension and diabetes within the past five years to the existing disclosure requirements. Both renewable and non-renewable options are available for this product. The renewable type offers a high-premium discount system: if the monthly premium exceeds 80,000 won, 50% of the excess amount is discounted, with a maximum discount benefit of up to 8,000 won.

Insurance companies are currently focusing on renewable health insurance because it aids in asset-liability management (ALM). ALM regulations require insurers to manage the value fluctuations of assets and liabilities in tandem as interest rates rise and fall. When the maturity of liabilities (insurance payouts) that insurers must pay in the future matches the maturity of assets managed through premiums, the impact of interest rate changes is reduced. Since renewable health insurance has a short maturity and is regularly renewed, it effectively shortens the liability duration for insurers. For example, auto insurance renewed annually essentially has a liability duration of one year.

Generally, insurers have a high proportion of long-term products, so their liability duration tends to be longer than their asset duration, resulting in a negative gap. The longer the liability duration, the greater the negative gap, and the higher the risk of capital reduction if interest rates fall. This also adversely affects the risk-based capital ratio (K-ICS).

Recently, insurance companies have been actively managing ALM. In the first quarter of this year, Samsung Life Insurance's duration gap was -1.6 years, but it narrowed to -1.4 years in the second quarter. Hanwha Life Insurance's duration gap decreased from 0.27 years in the first quarter to 0.08 years in the second quarter. During the same period, Tongyang Life Insurance (2 years to 1.2 years), Mirae Asset Life Insurance (0.79 years to 1.01 years), and Hyundai Marine & Fire Insurance (3.77 years to 3.01 years) also reduced their gaps. DB Insurance saw a slight increase in its gap, from -0.7 years in the first quarter to -0.8 years in the second quarter.

Financial authorities also plan to strengthen regulations to encourage insurers to reduce their duration gaps. They are considering measures such as setting limits on the allowable duration gap in supervisory regulations or introducing an ALM item in the K-ICS management evaluation. An insurance industry official stated, "After the introduction of International Financial Reporting Standards (IFRS17), insurers significantly increased long-term contracts to secure contractual service margins (CSM), but they neglected to secure long-term assets." He added, "Insurers are now reducing the duration gap through the sale of renewable health insurance, the purchase of long-term bonds, and the ceding of reinsurance."