The financial supervisory authorities have recently introduced measures to enhance regulatory oversight over “foreign-currency-denominated insurance policies,” which permit payment of premiums and proceeds in foreign currencies, and “zero/low surrender-value insurance policies,” which pay out less (or no) surrender value compared to typical insurance policies.
Foreign currency insurance policies are, in effect, investments in foreign currencies, and because the amount of insurance premiums and proceeds could fluctuate with the foreign exchange rate, they may fail to fulfill their essential role as insurance policies (i.e., risk coverage) depending on the circumstances. Despite the fact that the sale of foreign currency insurance policies has more than quadrupled in the last five years, insurers have not always been vigilant in informing policyholders about the risks created by fluctuations in the exchange rate when selling their policies, leading to an increase in misselling. Meanwhile, Korean regulators have been expressing concerns about such issues as potential consumer loss, insurers’ financial soundness, and the liquidity of the foreign currency in question.
To address these concerns, in December 2021, the financial supervisory authorities announced “plans to improve the foreign currency insurance system.” This included a plan to introduce regulations similar to those that apply to products with an investment component such as variable insurance policies, a plan to improve marketing practices to ensure that products are only sold to consumers who need such policies, as well as a plan to improve risk management.
1. Sales Process of Foreign Currency Insurance Policies
To better protect consumers, the authorities will require the following from insurers when they are selling their policies: (i) conducting a suitability and appropriateness test when selling products; (ii) confirming the actual intentions of the customer; (iii) explaining potential fluctuations in insurance proceeds due to shifts in the exchange rate; (iv) strengthening verification of material facts (e.g., via policyholder surveys or confirmation letters); and (v) strengthening monitoring and supervision in order to prevent misselling.
2. Added Responsibilities for Insurers Selling Foreign Currency Insurance Policies
The authorities will (i) impose more responsibilities on the representative directors of insurers that sell foreign currency insurance policies; (ii) have insurers inform elderly policyholders of material facts (via their designated representatives); and (iii) have insurers establish protective steps to address potential consumer complaints/disputes.
3. Fees for Foreign Currency Insurance Policies
To prevent the overly aggressive marketing of foreign currency whole life insurance policies that are subject to currency exchange risks over longer periods of time, the cap on sales commissions from whole life insurance policies that can be disbursed without being subject to the duty to disclose will be lowered.
4. Strengthened Risk Management for Foreign Currency Insurance Policies
Risk management will be strengthened by introducing the “Standards for Management of Liquidity Risks of Foreign Currency Insurance Policies” and mandating separate accounting for foreign currency insurance assets.
Meanwhile, “zero/low surrender-value insurance policies” typically collect lower premiums than conventional types of insurance policies, and sales of zero/low surrender-value insurance policies have been steadily increasing lately due to the prolonged low interest rate environment and increased price competition. However, as insurers rush to cut premiums for zero/low surrender-value insurance policies, there have been concerns that insurers’ financial soundness could be jeopardized and ultimately result in consumer harm because of, for instance, poorly structured policies and erroneous surrender rate estimations. In this context, in November 2021, financial supervisory authorities announced the following plan with the goal of ensuring that zero/low surrender-value policies are structured and sold in a sustainable manner.
1. Establishment of Standards for Calculation/Verification of Surrender Rates in Zero/Low Surrender-value Insurance Policies
The authorities will establish standards for determining surrender rates so that they can be calculated in a reasonable manner, taking into account factors such as policy types and surrender values. In addition, they will establish standards for surrender rate sensitivity analyses to allow insurers to assess the financial impact of actual changes in surrender rates prior to selling the product.
Insurers will document surrender rate calculations and sensitivity analyses, and decisions will be made by an executive-level committee whose members include the risk management officer.
2. Provision of Surrender Rate Data for Zero/Low Surrender-value Insurance Policies
To ensure that reasonable surrender rates are reflected in designing policies, the Korea Insurance Development Institute (the “KIDI”) will collect and analyze surrender rate data and provide insurance companies with “industry assumptions regarding surrender rates” and “average surrender rates” on a regular basis.
3. External Verification Procedures to Ensure Appropriate Surrender Rates for Zero/low Surrender-value Insurance Policies
Insurance companies will be required to have the KIDI or an external actuary verify the appropriateness of “surrender rates.”
The financial supervisory authorities plan to amend and enforce applicable laws and regulations, including the Enforcement Decree and the Supervisory Regulations of the Insurance Business Act, by the first half of 2022 in order to make regulatory improvements to foreign currency insurance policies and zero/low surrender-value insurance policies.