[1mm Financial Talk] 50% Insurance Premium Discount Extended... The Reason Behind Focus on 4th Generation Real Loss Conversion

Insurance Companies Offer 50% Discount on 4th Generation Real Loss Insurance Premiums
Switching to 4th Generation Remains 'Beneficial' Despite Reduced Premium Income

The insurance industry has extended the benefit of a 50% discount on premiums for 4th-generation indemnity health insurance until the end of the year. It appears they are focusing on the transition to the 4th generation by foregoing half of the premium income for an additional six months. It is interpreted that they are managing losses because maintaining the 1st to 3rd generation indemnity insurance is expected to result in massive losses.

According to the industry on the 21st, the Life Insurance Association and the General Insurance Association decided to extend the 50% premium discount benefit for switching to the 4th-generation indemnity insurance, which was scheduled from January last year to June this year, until the end of this year. Indemnity insurance is classified into 1st generation (old indemnity), 2nd generation (standardized indemnity), 3rd generation (new indemnity), 4th generation, and others (elderly, pre-existing conditions) based on the sales period and coverage structure. The 4th-generation indemnity insurance has a higher deductible ratio compared to previous generations but relatively cheaper premiums. The average premium for the 4th generation is about 12,000 KRW per month, which is 50-70% cheaper than the 1st and 2nd generations, which range from 20,000 to 40,000 KRW per month, and about 10% cheaper than the 3rd generation, which is around 13,000 KRW. With the additional 50% discount, the premium gap with previous generations widens even more.

Insurance companies are focusing on the 4th-generation transition even at the cost of some revenue loss because of performance reasons. Indemnity insurance has long suffered from chronic deficits due to excessive medical treatment and overbilling. According to the Financial Supervisory Service, the insurance industry recorded a deficit of 1.53 trillion KRW in indemnity insurance last year. Although the deficit margin decreased compared to the previous year, it still could not escape trillion-won level losses.

The proportion of the 4th-generation transition, which has control measures for excessive medical treatment, is only 5.8%, causing losses with every operation. Last year, the loss ratios (ratio of paid insurance claims to received premiums) by generation were 118.7% for the 3rd generation, 113.2% for the 1st generation, 93.2% for the 2nd generation, and 91.5% for the 4th generation. The insurance loss amount for the 1st to 3rd generations was 1.5448 trillion KRW, overwhelmingly surpassing the 101.8 billion KRW loss of the 4th generation.

If the current situation continues, some analyses suggest that the loss scale could reach 100 trillion KRW in the future. According to the Korea Insurance Research Institute, assuming the average annual growth rates of risk premiums and paid claims for indemnity health insurance from 2018 to 2021 were 11.9% and 14.7%, respectively, the cumulative loss of indemnity insurance is expected to exceed 104 trillion KRW by 2031.

It is also difficult to simply raise premiums to cover such losses. This year, the average premium increase rates for indemnity insurance were 6% for the 1st generation, 9% for the 2nd generation, and 14% for the 3rd generation. However, since 40 million people are enrolled and it is called the second National Health Insurance, playing a role as a social safety net, the authorities are closely monitoring premium trends. From the insurers' perspective, they are cautious about sharply raising premiums to break even due to regulatory scrutiny. Ultimately, transitioning to the 4th generation is the only option.

An insurance company official explained, "Losses from excessive medical treatment can eventually harm customers who do not engage in excessive treatment in the long term, so we are encouraging the transition to the 4th generation." He added, "The 4th-generation indemnity insurance premiums are relatively low, and if the frequency of premium claims is not abnormally high, premiums will not increase significantly at renewal, so the burden on consumers will not be large."