South Korea Introduces Tontin Insurance to Bolster Social Safety Net
The Financial Services Commission (FSC) of South Korea is preparing to launch Tontin Insurance, a new type of pension insurance, as part of a strategy to strengthen the social safety net. This initiative comes in response to the increasing challenges posed by an aging population and the need to provide more secure retirement options.
The FSC announced the plan on March 16th, highlighting the product as a key measure for future insurance tasks. The commission anticipates that Tontin Insurance will attract significant attention and contribute to a stronger social safety net.
Image generated by ChatGPT on the subject of the structure of Tontin Insurance, which receives more insurance money as you live longer.
Historical Context of Tontin Insurance
Tontin Insurance takes its name from Lorenzo Tonti, an Italian banker from the 17th century. Tonti proposed a financial method where participants contribute to a joint fund. As members pass away, the dividends are distributed among the remaining subscribers, with the longest-living members eventually receiving the highest payouts.
Initially, Tonti’s idea was used for state financing. It gained popularity in the 19th century, particularly in the United States, where some insurance companies sold Tontin life insurance between 1860 and 1910. Tontin life insurance in New York, introduced in 1868, grew to account for two-thirds of the entire U.S. life insurance market within two decades.
However, concerns regarding moral hazard, including potential for fraud and even murder to benefit surviving members, led to the prohibition of Tontin insurance by law in 1906. Subsequently, ethical issues led to its disappearance in many countries.
Modern Revival and South Korea’s Approach
With the rise of aging populations, Tontin Insurance has seen a resurgence in interest. The need for stronger private pensions has grown as individuals face the “long life risk” of living longer and potentially outliving their savings. Japan’s Nihon Life Insurance launched a Tontin Insurance product in the spring of 2016, which has gained considerable popularity.
The “Korean-style Tontin” is designed to provide less if a customer dies before the pension begins but to offer higher payouts than the premiums paid if they live longer. This structure allows those who live longer to receive more benefits. The FSC estimates that the Korean version, along with a Low Termination Pension, could increase pension amounts by up to 38% compared to typical pension products.
The FSC plans to implement measures to ensure insurers fully explain the product to customers before its launch, scheduled for early next year. This is intended to protect customers from potential losses if they are unaware of the risks involved. In addition to Tontin Insurance, the FSC intends to revitalize the pension insurance market.
The current ratio of private pension reserves to Gross Domestic Product (GDP) in South Korea stands at 28.5%, a figure that is only a fraction of that of the United States and the United Kingdom, underscoring the need for further development in this area.
