Foreign Currency-Based Insurance: Is It Appropriate to Encourage Customers to Quickly Switch Policies?

Editorial

13:59 JST, April 15, 2024

If financial products are being sold to earn commissions more often than to benefit customers, this is a serious problem. Financial institutions must once again realize that they have to conduct sales from a customer-first perspective.

The Financial Services Agency has released a report calling on financial institutions to improve their sales practices for foreign currency-based single-premium insurance policies, which are gaining popularity because of their high yields. The agency is questioning the practice of encouraging customers to frequently cancel policies and switch to other products of the same type over a short period of time.

Banks and other institutions can receive a large amount of commissions if customers cancel insurance policies to switch other policies relatively quickly. The FSA requested financial institutions to examine whether sales practices that focus excessively on commissions are being conducted.

In the case of foreign currency-based single-premium insurance policies, premiums are paid in a lump sum at the time the contract is formed, and insurance companies manage the money in foreign currencies such as dollars. Many such policies are purchased for the purpose of accumulating savings.

With interest rates rising in the United States and Europe, higher yields can be expected compared to managing funds in yen, which continue to involve ultra-low interest rates. The recent depreciation of the yen has also contributed to the popularity of this product, as profits converted into yen have become larger.

According to industry estimates, sales of this type of insurance product in fiscal 2022 exceeded ¥4 trillion, nearly double the previous year.

However, according to a survey by the agency, about 60% of the customers cancelled their contracts within four years of purchase. There were numerous cases where the same types of products were subsequently sold to the same people.

This practice has been attributed to the fact that “target-type insurance policies” — which automatically switch to yen-based asset management once investment performance reaches a certain target and profits are secured — comprise a large portion of the sales of foreign currency-based single-premium insurance.

Since the yield in yen is low, financial institutions may be encouraging customers to purchase other foreign currency-based products after cancelling them.

Although it is advantageous for the financial institution to see such switches over a short period of time, the customer is charged a commission twice as well as a cancellation fee, resulting in a lower profit.

In the case of target-type insurance, the targets can be raised midway, but financial institutions are believed to not fully explain this to customers.

Most foreign currency-based single-premium insurance products require high commissions in the first year of the contract, and some believe that this induces financial institutions to seek a relatively quick switch to new products.

Sales techniques that financial institutions use to get customers to frequently buy and sell financial products such as investment trusts, in order to earn commissions, have been viewed as a problem for a long time.

Financial institutions need to scrutinize whether they are repeatedly selling products without regard for the welfare of their customers. Insurance companies should reconsider their product designs.

The government is emphasizing measures to support individual asset management. If financial institutions lose credibility, they may hinder such efforts. Financial institutions should be aware of the weight of their responsibility.

(From The Yomiuri Shimbun, April 14, 2024)