[Becoming an Insurance Insider] "Let's Switch to Better Insurance"... Unending Unfair Contract Transfers

Inducing Cancellation of Existing Insurance and Subscription to New Products for Performance
"Specific Criteria Needed to Prevent Seunghwan Contracts"

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[Asia Economy Reporter Oh Hyungil] Dongyang Life Insurance and Fubon Hyundai Life Insurance were recently fined by the Financial Supervisory Authority for 'unfair replacement contracts.' When selling insurance via telemarketing, they omitted the explanation in the standard product script that canceling an existing insurance contract and entering into a new insurance contract may cause losses to the policyholder, and confirmation that the new insurance contract was concluded according to the policyholder's intention.

Under the Insurance Business Act, those engaged in concluding or soliciting insurance contracts must prove by handwritten signature or recording that the policyholder is aware that canceling an existing insurance contract and entering into a new insurance contract may cause losses.

The chronic problem of unfair replacement contracts, a form of incomplete sales in the insurance industry, is not decreasing easily. There are calls to resolve unclear areas to prevent disadvantages to policyholders and to enhance trust in the insurance industry.

According to the Korea Insurance Research Institute, the Insurance Business Act prohibits those engaged in concluding or soliciting insurance contracts from inducing policyholders or insured persons to unjustly cancel existing insurance contracts and apply for new contracts, so-called unfair replacement contracts.

This is because insurance solicitors may disrupt the order of solicitation by canceling existing insurance to boost their performance and induce new product subscriptions, or focus solely on acquiring new contracts, which can harm policyholders.

In particular, the Insurance Business Act recognizes the cancellation of an existing contract within one month before or after concluding a new insurance contract as an unfair replacement contract, except when the policyholder proves that they are aware of the possibility of loss.

Also, if an existing insurance contract is canceled within six months before or after a new insurance contract, it is considered unfair if the policyholder or insured is not provided with a comparative guide on important matters of the existing and new contracts.

Experts point out that because some content is unclear, it is necessary to establish specific standards to more clearly prevent unfair replacement contracts.

For example, if the existing contract is maintained normally at the time of applying for the new contract but is canceled later, it can be problematic whether providing comparative guidance at the time of the existing contract's cancellation is sufficient or if it should be provided at the time of applying for the new insurance contract.

Since the Insurance Business Act does not clearly specify the timing of comparative guidance, differing interpretations arise, so it is necessary to clarify standards through future legal amendments, authoritative interpretations, or guidelines.

Specific standards are also required regarding the scope of similar insurance contracts, the scope of cancellation, whether comparative guidance is necessary for voluntarily initiated cases, and whether policyholders or insured persons must fulfill disclosure obligations when claiming the reinstatement of unfairly canceled insurance contracts.

Baek Young-hwa, a research fellow at the Korea Insurance Research Institute, explained, "It is necessary to consider introducing a comparative guidance system through the Credit Information Service to enable comparative guidance for replacement cases involving other companies, as well as introducing an obligation to explain when canceling insurance contracts."