With the average declared interest rate to be applied to insurance products in 2026 lowered, the likelihood of next year's premium increases has grown. When the declared rate falls, the return insurers are expected to earn by investing premiums also often declines, leading to pressure to raise premiums.
According to the insurance industry on the 22nd, as of on the last month, the declared interest rate for protection-type policies at 17 life and non-life insurers was 2.2%, down 0.16 percentage points (P) from December last year (2.36%). Over the same period, the annuity insurance declared rate fell 0.12 percentage points to 2.29%, and the savings insurance declared rate fell 0.12 percentage points to 2.22%.
The average declared interest rate, derived by weighting each insurer's declared rate by premium reserves and applied in the next business year, was adjusted from 2.75% this year to 2.5% next year. It is the first change in two years since it was raised to 2.75% in 2023. This is seen as the effect of the Bank of Korea cutting the base rate four times since Oct. last year.
The declared interest rate is calculated by reflecting the rate of return earned by insurers from investing premiums received from customers and market interest rates. When the base rate and market rates fall, the declared rate tends to fall as well. A lower declared rate means the yield on insurers' invested assets declines, resulting in smaller maturity payouts for subscribers to savings-type policies such as savings and annuity insurance.
When the declared rate falls, the assumed interest rate, which indicates the future return that can be earned by investing premiums, is also likely to decline. If the assumed rate falls, insurers need to collect more premiums from customers to defend against a reverse margin (a loss that occurs when the interest rates on deposits or loans sold by a financial institution are lower than its investment return). The industry believes that if the average declared rate falls by 0.25 percentage points, premiums could rise by 5%–10%.
A drop in the assumed rate leads to pressure to raise premiums for non-life insurance products. Life insurers, whose main products are whole life and annuity policies, can reflect rate movements because they invest mainly in long-term bonds. In contrast, non-life insurers are sensitive to rate changes because they hold many short-term assets. Customers who newly purchase products or who hold renewable policies whose premiums rise at set intervals are affected. Major non-life insurers raised premiums in Aug. due to a cut in the assumed rate.
With the financial authorities set to announce guidelines next year requiring the loss ratio for new collateral to be assumed at 100%, there is an outlook that premiums could rise. The loss ratio is claims paid relative to premiums received; the higher the loss ratio, the smaller the profit.