[Public Voices] Will Limiting Insurance Surcharges Benefit Farmers and Fishers?

Prohibition of Surcharges Based on Disaster Risk
Amendment to the Agricultural and Fishery Disaster Insurance Act
An Unreasonable Policy That Contradicts Insurance Principles

Namsangwook, President of the Korean Risk Management Society (Professor, Department of Business Administration, Seowon University).

The partial amendment to the Agricultural and Fishery Disaster Insurance Act recently passed the National Assembly. This amendment includes several provisions that will bring fundamental changes to the insurance system. In particular, a new regulation prohibiting surcharges based on disaster risk when calculating insurance premiums has been added. The purpose appears to be to reduce the economic burden on farmers and fishers.

However, there are serious concerns about negative side effects regarding the stability and sustainability of agricultural and fishery disaster insurance. Since this could potentially undermine the foundation of the insurance system, a cautious approach is necessary.

The essence of insurance is for many people to pool funds to compensate for losses in preparation for uncertain accidents or risks. Therefore, for insurance to operate smoothly, insurance premium income and insurance payout expenses must be balanced. If the probability of an accident is high, premiums should be increased accordingly, and if the probability is low, premiums should be reduced to maintain balance. This ensures that insurance payouts can be properly made when an accident occurs.

If the same premium is applied regardless of accident risk, that is, disaster occurrence, the premiums collected will be less than the insurance payouts to be made. This causes income and expenditure to be unbalanced. Ultimately, this will lead to depletion of the insurance fund and may cause the insurer to face bankruptcy. In such a case, the damage will be borne entirely by the policyholders.

To avoid this, the shortfall in premiums must be compensated in some way. It is highly likely that premium discounts previously given to policyholders in low-risk areas will disappear. This is unreasonable. It is not a fair premium imposition based on accident risk rates. It contradicts the principle of insurance and also conflicts with the Insurance Business Act, which requires fair calculation of premium rates.

For these reasons, most countries, including the United States and Japan, operate premium surcharge systems that reflect regional disaster risk levels. Even the U.S. Federal Crop Insurance sets higher premium rates for areas frequently affected by hurricanes or droughts to prevent depletion of insurance funds and ensure the sustainability of the insurance system. Japan also imposes surcharge premiums in agricultural disaster compensation insurance for regions with high disaster risk. Additionally, the indemnity health insurance, known as the second health insurance, recently introduced a premium discount and surcharge system. Premiums are adjusted from -5% to 300% based on the amount of non-reimbursed medical expenses received under the 4th generation indemnity health insurance. Such discounts and surcharges are fundamental insurance principles to maintain the stability and sustainability of insurance.

In the short term, this amendment may reduce the economic burden for some farmers and fishers. However, in the medium to long term, it is highly likely to cause instability in insurance finances, reduce the sustainability of the system, and ultimately lead to issues such as increased tax input or reduced insurance benefits. This could run counter to the original purpose of protecting farmers and fishers.

The surcharge system also functions to encourage farmers and fishers to mitigate disasters. Of course, natural disasters cannot be avoided or controlled by the will of the farm households, but through the surcharge system, preventive measures such as installing disaster prevention facilities or cultivating crops adapted to climate change can be encouraged. This has a positive effect of reducing disaster risk and enhancing the resilience of farmers and fishers. However, there is concern that this positive function may be weakened by the recent amendment.

Everyone shares the intention to support farmers and fishers. To truly improve the efficiency of agricultural and fishery disaster insurance and protect farmers and fishers, the principles and fundamentals of insurance must be faithfully observed. Only then can insurance be robust and provide unwavering insurance coverage to farmers and fishers.

Nam Sang-wook, President of the Korean Risk Management Society (Professor, Department of Business Administration, Seowon University)