Trend of the Whole Life Insurance Market in Korea
Whole life insurance is one of the major segments of the life insurance market in Korea. Although its growth pace has slowed recently after years of strong sales, whole life insurance still takes up a large share of the individual life insurance market in the country. The share of whole life insurance in the total individual life insurance sector had increased from 23% in 2010 to 30% in 2019 and then stayed at 29% in 2000 and 2021 according to a report by the Korea Insurance Research Institute.
In terms of whole life premium income, the pace of growth stabilized after recording a year-on-year increase rate of 12.8% in 2015 and 9.7% in 2016. The growth rate turned to negative in 2021 mostly because of declining economic prospects and strengthened supervision of new product development due to concerns over mis-selling.
Whole life insurance provides permanent death coverage for the life of the insured and typically offers a fixed amount of premium and a fixed death benefit together with a cash value savings component. As long as premium payments are made as agreed upon, the insured will be covered for life unlike with term life insurance that provides coverage for a set period of time. With the savings component, a whole life policy can function as an investment because the accumulated cash value can be used as an emergency fund or for other purposes.
The development of new types of whole life insurance products in Korea accelerated in 2015 and 2019 in step with evolving market needs amid rising life expectancy and low interest rates. The number of newly launched whole life products peaked to 118 in 2015 compared to 34 in 2010. After a period of decline, it soared again to 101 in 2019.
The boom in launching new whole life products in 2015 reflected the development of whole life insurance policies that come with the feature of prepayment of death benefit pension. This new type of whole life insurance allows the insured to receive annuity payouts from the accumulated cash value without surrendering the policy. Life insurers sought to respond to growing consumer demand for financial products that provide income security during retirement years. Consumers were attracted to insurance coverage against death in combination with the advance benefit payment component, which can be used as a source of retirement income.
Between 2019 and 2020, there was a rise in whole life insurance sales driven largely by low-surrender-value insurance products, which would charge lower premiums than other whole life policies and provide no or lower cash surrender value if policyholders cancel their insurance before the premium payment term expires. However, such products caused market confusion and resulted in mis-selling practices where insurance sales pitches focused only on the high cash surrender value after the end of the premium payment term.
Sales of simplified issue whole life policies increased during 2020 and 2021 as they gained popularity among people with chronic conditions. Simplified issue whole life insurance is a type of permanent life insurance that provides a small amount of death coverage to those who do not qualify for other traditional policies. Although premiums are higher or the coverage is lower, seniors or people with pre-existing conditions can benefit from such products as a means of increasing their financial security.
Another important driver behind strong initiatives to sell whole life insurance was regulatory changes such as commission structure reform and transition to IFRS 17, leading life insurers to shift their focus to protection products in order to reduce their interest risk exposure.
Under IFRS 17, profits from a long-term contract should be booked over the length of the contract, not in the year in which the contract is initially made. In this respect, a major profitability indicator is the Contract Service Margin (CSM), which represents the unearned profit that an insurer recognizes as it provides services over the coverage period. After initial recognition, the subsequent measurement of the CSM depends on the type of an insurance product, and long-term protection products like whole life insurance are generally favorable for insurers to increase their CSM.