Insurers and premium
By Kim Soo-bong
Kim Soo-bong is deputy governor of insurance at the Financial Supervisory Service.
A few years ago, an insurer launched a TV commercial featuring anxious people. In it, children who cannot sleep due to anxiety express their worries to a small doll and place it under their pillow before going to sleep. According to Guatemalan folklore, the doll is thought to worry on behalf of those who do this, thereby permitting children to sleep peacefully. Consistent with the meaning of insurance “relieving customers of worry and anxiety,” the commercial was a hit.
However, it seems that these days, people are saddled with new worries. According to a survey of the Korea Life Insurance Association, a household holds on average 4.3 private insurance policies, which means that all households are covered by four or more insurance plans. These figures suggest that insurance is now considered as a necessity for life, rather than just one of many financial products to invest in.
Recently, insurers are poised to increase premiums because the financial regulator is expected to cut the standard rate of interest in April. People who are already covered by insurance are worried that they will have to pay more for the same coverage. Those who are not insured yet are worried that they would have to buy an insurance policy before premiums are increased.
This is the time when the regulator should provide financial consumers with accurate information about the relationship between the cut in standard rate of interest and an insurance premium increase.
First, the standard rate of interest is one of many factors that determine insurance premiums. The cut in the standard rate does not always mean that all insurance companies increase premiums. They can refrain from raising premiums by curbing operating expenses.
Second, premium adjustments resulting from the rate change is limited to protection-type insurance policies such as whole life insurance which accounts for about 30 percent of total premium income. The rate change won’t affect savings-linked and annuity insurance.
Third, existing insurance policies would not be affected by the rate change. Only new insurance policies will be affected by the rate change and the premium will be adjusted accordingly.
Of course, the premium or the price of an insurance policy should be determined by insurance companies, taking into account loss ratio, expense ratio, premium rate and their management strategies. Nevertheless, the financial regulator tries to supervise the adjustment of insurance premiums because it is not desirable for insurers to pass on the burden of increased risk to consumers amid the low interest rate trend and rising loss ratio.
Even if premium increases are unavoidable, insurance companies should first reduce operating expenses and take other self-saving measures to minimize the burden of consumers.
In addition, they should not mislead consumers about insurance premiums, creating a misconception that premiums of all insurance policies will increase. They should not solicit consumers to buy insurance policies in a hurry before the premium is adjusted.
Grace Murray Hopper, a U.S. scientist, said “The most damaging phrase in the language is; it’s always been done that way.”
Insurance companies have always been passing on the burden of premium increases to policyholders, seeking external growth by soliciting consumers to buy insurance policies and negligent in providing quality service for existing consumers.
However, I hope that they would refrain from excessively increasing insurance premiums and focus on ensuring consumer confidence, the most precious value of a financial company.