The Financial Services Commission and the Korea Deposit Insurance Corporation issued a news release on the 16th of last month, announcing the presidential decree to raise the deposit protection limit from 50 million won to 100 million won. The news release listed the types of 'protected deposits' covered by the Korea Deposit Insurance Corporation, one of which was 'insurance company premiums.'
Reporters who received the news release were puzzled because they believed that the premiums paid by customers to the insurance company were not subject to deposit protection. When contacted by the Korea Deposit Insurance Corporation, a representative noted, "Since there are no deposits in insurance, the premiums paid are considered protected deposits," adding, "the standard for payout to customers (according to deposit protection) is the surrender value." It seems confusing that the premium is mentioned as a protected target, but the standard for actual payout is the surrender value.
We entrust our money to financial institutions such as banks. However, if a bank goes bankrupt and becomes insolvent, our hard-earned money can disappear. To prepare for such situations, the government returns the money on behalf of the bank. It cannot return everything, as there is a limit. The limit has been 50 million won since 2001, but starting from September, after 24 years, it will increase to 100 million won. Now, even if a bank goes bankrupt, we can get back up to 100 million won.
Insurance policyholders also pay premiums to insurance companies. If an accident occurs or they fall ill, they receive insurance benefits. Similarly, to prepare for the bankruptcy of an insurance company, the government pays money on behalf of the insurer within the limit. So what money should be refunded? Is it the premium paid so far or the insurance benefits to be received in the future?
The answer is not the paid premiums but the surrender value. The surrender value is the money received when terminating an insurance contract. The problem is that the surrender value is generally less than the premiums paid. This is because the product itself is designed that way. In particular, benefits insurance covering injuries and illnesses typically has no interest, and because business expenses are deducted, the surrender value is inevitably lower than that of savings insurance.
The domestic insurance industry is further problematic for selling non-renewable and low-renewal products that pay less than standard surrender values or do not pay them at all. In an extreme case, a customer who buys a non-renewable product may end up with a surrender value of zero, meaning that if the insurance company goes bankrupt, they will not receive any of the premiums paid. For low-renewal products, they will likely receive an absurdly low amount compared to the premiums paid.
However, not many customers are aware of these facts. According to a report released by the Korea Development Institute (KDI) in 2021, a survey of 1,200 holders of benefits insurance found that only 210 people (17.5%) knew that the correct answer (the amount protected under deposit protection is the surrender value). There were 505 people (42.1%) who thought the payment to be received was protected, and 483 people (40.2%) thought that the premiums paid were protected.
KDI research fellow Hwang Sun-joo said, "Those who expected that insurance benefits or premiums would be protected might be shocked by the fact that only a lower surrender value is protected."
This blind spot was highlighted in the MG Non-Life Insurance incident. Designated as a failing financial institution, MG Non-Life Insurance decided to transfer its contracts to five non-life insurance companies without changing the terms after failing to sell itself. The decision came as there were as many as 11,470 policyholders (1.756 billion won) whose contracts would be excluded from deposit protection if MG Non-Life Insurance went bankrupt. Even if included in the deposit protection category, actual damage would be greater since only the surrender value would be paid.
Some argue that the deposit protection target should be based on the insurance benefits. In fact, in countries like the United States and the United Kingdom, both surrender values and insurance benefits are protected. In the U.S., even if an insurance company goes bankrupt, customers can receive insurance benefits within a limit of $250,000 to $500,000. This limit is higher than the bank limit of $250,000. Insurance customers are receiving greater protection than bank depositors.