FSS: "Insurers Overemphasize Only Foreign Exchange Gains"
"Neglecting to Explain Risks of Exchange Rate and Interest Rate Fluctuations"
"Dollar-Denominated Insurance Is Not a Product for Currency Speculation"
On January 15, the Financial Supervisory Service announced that it would issue a consumer alert (caution) to prevent consumer damage related to dollar-denominated insurance products.
Dollar-denominated insurance is a high-risk product in which premiums and insurance payouts fluctuate depending on exchange rates or overseas bond interest rates. Recently, amid a strong dollar and expectations of further exchange rate increases, sales of dollar-denominated insurance have surged as consumers seek foreign exchange gains. In 2023, 11,977 such policies were sold, and in 2024, 40,594 were sold. From January to October last year alone, 95,421 policies were sold.
Recently, in the process of selling dollar-denominated insurance, insurers have increasingly emphasized only the potential for foreign exchange gains while neglecting to explain the risks associated with exchange rate and interest rate fluctuations, raising concerns about possible misselling.
Dollar-denominated insurance is structured so that premiums increase when the exchange rate rises and payouts decrease when the exchange rate falls. If overseas interest rates decline, the accumulation rate for premiums also decreases, which can lead to lower payouts.
Dollar-denominated insurance is not a financial product designed for currency speculation. Aside from the fact that premiums are paid and benefits are paid out in foreign currency, it has the same fundamental characteristics as won-denominated insurance products. Only the portion of the premium remaining after deducting the amount used to cover risks such as death and business expenses is accumulated, meaning that not all of the premiums paid are invested. Therefore, it is not suitable as a product for achieving foreign exchange gains.
If the exchange rate fluctuates, the premiums to be paid may increase or the payouts received may decrease, potentially resulting in consumer losses. Since both the premiums paid and the payouts received in the future are in foreign currency, the value of premiums and payouts in Korean won may vary depending on the exchange rate at the time of payment or payout.
If overseas market interest rates fall, insurance payouts and refunds may also decrease. Insurance products accumulate part of the premiums paid by consumers as reserves for future payouts. Depending on the structure of the interest rate applied to these reserves, products are classified as either interest rate-linked or fixed interest rate. Among dollar-denominated insurance products, interest rate-linked products determine the accumulation rate based on the interest rates of the overseas bonds they invest in. Therefore, if overseas market interest rates fall, payouts may be lower than expected.
These are long-term products that may result in principal losses if canceled early. Dollar-denominated insurance is a long-term product (five or ten years or more) with a specified payout date, and there is no way to actively respond to exchange rate fluctuations except by canceling the contract. If canceled early, the refund may be less than the principal paid.
A Financial Supervisory Service official stated, "We will thoroughly examine potential consumer harm, such as misselling, resulting from the increase in sales of dollar-denominated insurance, and will make every effort to protect consumers." The official added, "For insurers whose sales of dollar-denominated insurance are rapidly increasing, we will hold executive-level meetings to discuss measures to prevent consumer harm and conduct on-site inspections. Any illegal activities identified in the sales process of dollar-denominated insurance will be dealt with swiftly and strictly in accordance with a zero-tolerance policy."
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