September 26 3rd Insurance Reform Meeting Held
Flu Insurance Overcompetition... Coverage Limit Guidelines
New 'Cancellation Rate' to Be Added as Actuarial Firm Verification Item
With the introduction of new accounting standards for insurance companies, products aiming for so-called 'one-shot gains' through excessive coverage have frequently shaken the industry. Additionally, there are criticisms that companies inflate their performance by writing cancellation rates and loss ratios too optimistically. In response, financial authorities plan to improve the system by establishing guidelines for coverage limits and review criteria to set coverage amounts reasonably. Furthermore, some actuarial assumptions in the insurance product development process will be entrusted to actuarial firms for verification.
According to financial authorities on the 4th, the Financial Services Commission and the Financial Supervisory Service held the "3rd Insurance Reform Meeting for Trust Recovery and Innovation" on the 26th of last month, chaired by Kim So-young, Vice Chairman of the Financial Services Commission, and announced these system improvement measures. The Insurance Reform Meeting is a consultative body launched by financial authorities in May to drastically improve problematic insurance practices and systems, involving academia, related organizations, research institutes, insurance companies, and the Insurance Association.
At this Insurance Reform Meeting, measures to establish sound competition were discussed so that consumers can receive coverage as needed while reducing insurance premiums. With the introduction of the new international accounting standard (IFRS17), the impact of securing new contracts on profitability has increased, leading to overheated competition over coverage limits in the insurance industry recently. There have been criticisms that competitive increases in coverage amounts for influenza insurance, hospitalization, outpatient care, nursing daily allowances, driver insurance lawyer fees, and traffic accident support funds have induced moral hazard.
Accordingly, financial authorities have prepared guidelines and review criteria to enable reasonable setting of coverage limits during the insurance product development process. The guidelines consider average costs such as expected actual expenses for treatment and nursing care but exclude unrelated items like consolation money and transportation expenses. Future cost increase rates can only be reflected if objectively predictable. For reported products, it is mandatory to state the basis for calculating coverage amount limits in the product report, and review criteria for setting coverage limits have been established. For voluntary products, coverage limits for some recently problematic coverages must be stated in the product basic documents.
Ko Young-ho, Director of the Insurance Division at the Financial Services Commission, explained, "Recently, in the insurance industry, there have been many cases of excessively increasing coverage limits for some insurance products, such as raising influenza insurance coverage up to 1 million won. Due to such unhealthy competition, consumers bear high premiums, and moral hazard may occur, so we aim to induce sound competition."
Financial authorities also plan to improve the 'inflation' of Contractual Service Margin (CSM). With the introduction of IFRS17, CSM has become a core profitability indicator, representing the concept of recognizing future profits from insurance contracts annually. However, the figures can vary depending on the insurer's assumptions. Since insurers can choose future lapse rates for no-lapse insurance or loss ratios for indemnity medical insurance themselves, it has become difficult to compare with other companies or even with the same company's past performance. Therefore, lapse rates and other assumptions will be newly included as verification items by actuarial firms during insurance product development, and specific procedures and standard forms for each verification item will be prepared to enhance the effectiveness of external verification.
When selling insurance products, unfair profits from arbitrage by corporate insurance agencies (GA) will be prevented. The prohibition period for arbitrage transactions will be expanded from the current one year to the entire insurance contract period, and all direct support expenses as well as payment commissions will be included in judging arbitrage. Arbitrage refers to contracts where the sum of sales commissions and surrender refunds exceeds the premiums paid, which may induce false insurance contracts.
Additionally, the insurance company's internal product committee, which has been operated formally until now, will be enabled to serve as the control tower for insurance product management. The product committee will oversee all situations in the product development and sales process, including product planning, launch, and post-management. Participation of product managers as well as the Chief Risk Officer (CRO), Chief Customer Officer (CCO), and Compliance Officer will be mandatory, and the deliberation and resolution contents will be reported to the CEO.
Kim So-young, Vice Chairman of the Financial Services Commission, held the 3rd Insurance Reform Meeting on the morning of the 26th of last month at the Government Seoul Office in Jongno-gu, Seoul. The meeting included academic societies such as the Financial Consumer Society, related organizations, research institutes, insurance companies, and the Insurance Association. They discussed measures to establish sound competition in the insurance industry, current issues in the insurance industry and citizen-centered tasks, improvement plans for the surrender value reserve system, and measures to strengthen internal controls of insurance companies. [Image source=Financial Services Commission]
At this Insurance Reform Meeting, internal control regulations for preventing insurance fraud and moral hazard were also specified. After conducting an insurance fraud impact assessment on the coverage contents and limits of insurance products, the product committee will review the appropriateness of the results. When setting and reviewing coverage limits by contract holders for each coverage, the coverage limits of existing contracts, including those from other companies, must be aggregated to prevent excessive coverage limit settings.
Furthermore, to strengthen the effectiveness of internal controls in insurance companies, guidelines for preventing financial accidents have been established. According to the Financial Supervisory Service, since 2018, financial accidents in the insurance industry have occurred at an average of 8.85 billion won (14.5 cases) annually. Therefore, employees handling high-risk tasks such as monetary transactions are prohibited from continuous long-term service for more than five years, and high-risk transactions must involve multiple personnel and departments. Additionally, compliance monitoring personnel should be expanded to at least 1% of employees, with more than 50% of compliance staff composed of specialists.
Kim So-young, Vice Chairman of the Financial Services Commission, stated, "We will prevent financial accidents and unhealthy competition in insurance companies in advance through establishing sound competition and strengthening internal controls. We will create conditions for insurance companies to compete with products for consumers in the long term and pay appropriate insurance benefits only for necessary coverage."
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