Samsung Life Insurance (032830.KS) lowered the crediting rate on its savings insurance products to 2.28% in September from 2.33% in January, a cut of 0.05 percentage point. Despite the Bank of Korea's rate increases, the company reduced crediting rates on both protection-type insurance and pension savings products, excluding non-participating annuities. Over the same period, Hanwha Life Insurance (088350.KS) also lowered its savings insurance crediting rate to 2.18% from 2.22%. Both figures fall below the 2.40% time deposit rate estimated by the Korea Insurance Development Institute for October. As market interest rates climbed steeply this year, loan interest costs rose sharply while the interest insurers pay on policy reserves either declined or stayed flat.
Because major insurers did not raise crediting rates in line with the increase in market rates, the average crediting rate calculated by the Financial Supervisory Service for next year fell 0.25 percentage point to 2.25%. The yield on three-year Korean treasury bonds rose nearly 1.4 percentage points to 3.838% on Aug. 31 this year from 2.435% on Sept. 1 last year. As a result, the gap between the average crediting rate and the base rate widened to 0.75 percentage point, after the two stood level at 2.50% earlier this year.
By contrast, the benchmark rate published by the Korea Insurance Development Institute, applied mainly to interest-linked products, stood at 3.8% in October, up 0.6 percentage point from 3.2% in February. That is the highest level in two years and three months, since July 2024, when it also reached 3.8%. The indicator is calculated monthly using time deposit rates, corporate bond yields and treasury bond yields from the preceding three months. Insurers' own benchmark rates also rose along with market rates, but the companies held crediting rates in check by lowering their adjustment ratios.
A decline in the average crediting rate means the rates insurers applied to their products over the past year have fallen. For policyholders, that translates into higher premiums for the same level of coverage.
The concern is that the average crediting rate will also be used to set premiums on new contracts next year. Insurers typically adjust their assumed interest rates in line with the average crediting rate absent a reasonable justification. Companies price premiums based on returns generated from investing the money they collect from policyholders, and the lower the assumed interest rate, the smaller those returns.
Savings-type insurance and short-payment whole life policies are seen as the products most affected by the average crediting rate. Premiums for indemnity health insurance, general health coverage and conventional whole life policies are influenced more by loss ratios and mortality rates than by interest rates. Auto insurance premiums, however, are widely expected to rise next year given the recent increase in loss ratios. The combined auto insurance loss ratio at the four major non-life insurers — Samsung Fire & Marine Insurance (000810.KS), Hyundai Marine & Fire Insurance (001450.KS), DB Insurance (005830.KS) and KB Insurance (002550.KS) — came to 84.7% for the January-August period, up 0.3 percentage point from a year earlier.
With market rates rising quickly on higher sovereign bond yields in major economies, adding to interest burdens, analysts warn that increases in insurance premiums would weigh especially heavily on vulnerable groups. The Bank of Korea estimates that a 0.25 percentage point rise in rates would add 3.3 trillion won ($2.4 billion) to household interest costs.
Higher premiums are also likely to hit insurers' earnings by driving policyholders away. Net profit at life insurers rose sharply in the first half of this year, but most of the gain came from investment returns, while profit from their core insurance business fell 26.2% from a year earlier. New life insurance contracts dropped 12.9% to 4,112,902. Surrender payments climbed 39.2% from a year earlier to 28.97 trillion won ($21.1 billion) in the January-May period as money moved elsewhere. Raising premiums, analysts say, will not easily shore up profits.
As a result, industry officials say competition is intensifying in products with no or low surrender value as insurers try to keep policyholders from leaving in the face of higher premiums. Because such policies pay back less than conventional products when canceled, their premiums run 10% to 40% cheaper. With insurers signaling premium increases next year, they may also turn to sales pushes aimed at closing contracts before the year ends.
"When premiums go up, policyholders drop off, so each insurer is selling more no- and low-surrender-value products to offset that," an industry official said. "A problem is emerging in which insurers are making optimistic assumptions about cancellation rates, and financial authorities are keeping a close watch."
