[Real-World Finance] Fifth-Generation Indemnity Insurance at Half Price... Weigh the Pros and Cons as Coverage Narrows

Early First- and Second-Generation Policyholders' Response Is Key
Fifth Generation Is Advantageous for Patients at General and Tertiary Hospitals
and Those Planning Pregnancy or Childbirth

The government will launch the fifth-generation indemnity health insurance product, known as the "second national health insurance" to which eight out of ten Koreans are subscribed, in the second half of the year. While premiums are expected to be up to 50% lower than those of the current fourth-generation products, the coverage for non-reimbursable items such as manual therapy will be reduced. This has raised concerns about whether early first- and second-generation policyholders will switch to the fifth generation. However, the fifth generation may be more advantageous for those who do not visit hospitals frequently, patients undergoing surgery at general or tertiary hospitals, and those preparing for pregnancy or childbirth, so it is important to review the options carefully.

Fifth Generation Is Beneficial for Those Who Visit Hospitals Less Frequently

Soyeong Kim, Vice Chairman of the Financial Services Commission, is speaking at the Insurance Reform Meeting held on December 16 last year at the Government Seoul Office in Jongno-gu, Seoul. Photo by Yonhap News

Indemnity health insurance is categorized into five generations based on the time of enrollment. Among these, the early first- and second-generation selectable products do not have a renewal cycle stipulated in their terms. Approximately 15.82 million policyholders (6.54 million in the first generation and 9.28 million in the early second generation) can maintain their policies without any changes to the terms until maturity if they enrolled with a maturity age of 100. The first and second generations have little or no out-of-pocket expense and offer broad coverage. This is why many believe that first- and second-generation policyholders may not prefer to switch to the fifth generation.

However, for policyholders who do not receive frequent hospital treatment and therefore incur lower medical expenses, the fifth generation, which has a lower base premium, may be more advantageous. In fact, when combining the out-of-pocket expenses and annual premiums of policyholders, the total cost for the fifth generation is found to be lower than that of previous generations.

According to the Korea Institute for Health and Social Affairs, the average annual medical expense per person in 2021 was 960,000 won. The consumer price inflation rate in 2021 was 2.5%. Reflecting this inflation rate, the average annual medical expense per person is estimated at 984,000 won. Assuming this entire amount is processed through indemnity insurance, the first generation requires no out-of-pocket payment. For the fifth generation, the estimated out-of-pocket expense for hospitalization is about 255,840 won (20% for reimbursable items, 30% for non-reimbursable items), and for outpatient care, about 452,640 won (40% for reimbursable items, 30% for severe non-reimbursable, and 50% for non-severe non-reimbursable items). These figures are calculated based on the proportion of non-reimbursable (about 60%) and reimbursable (about 40%) claims in total indemnity insurance payouts in Korea. For the 'reimbursable' outpatient treatment in the fifth generation, the out-of-pocket rate is linked to the National Health Insurance rate, which is typically 40% for secondary hospitals (hospitals and general hospitals with 30 to 499 beds).

According to the insurance industry, to properly compare the costs borne by first- and fifth-generation policyholders, annual premiums must also be considered. At a major non-life insurance company, the monthly premium for a 40-year-old male in the first generation is estimated at 54,300 won (651,600 won annually), while for the fifth generation it is 10,220 won per month (122,640 won annually). When combining the out-of-pocket expenses and base premiums for each generation at this insurer, the annual cost for the first generation is 651,600 won (0% out-of-pocket), for fifth-generation outpatient care it is 575,280 won (122,640+452,640 won), and for fifth-generation hospitalization it is 378,480 won (122,640+255,840 won). For both hospitalization and outpatient care, the fifth-generation policyholder's burden is 76,320 won less than that of the first generation.

Expanded Coverage for General Hospitals, Pregnancy, and Childbirth

The government has named the fifth-generation indemnity insurance as "insurance that truly helps when needed." The government considers reimbursable and severe non-reimbursable items as "truly necessary" coverage.

For non-severe non-reimbursable items, which are deemed less essential, coverage will be reduced. These include manual therapy, extracorporeal ultrasound for musculoskeletal treatment, and non-reimbursable injections. Non-severe non-reimbursable items may be included in the managed care category. The government plans to introduce a managed care system that applies separate management regulations to non-reimbursable items with high risk of overtreatment. If non-severe non-reimbursable items are included in this category, the out-of-pocket rate can rise to a maximum of 95%.

Outpatient (ambulatory) treatment compensation levels will also be reduced. The maximum compensation per visit will change from 200,000 won per hospital to 200,000 won per day. In previous generations, policyholders could receive up to 200,000 won per hospital even if they visited multiple departments such as ENT or orthopedics in a single day. In the fifth generation, the total daily compensation is capped at 200,000 won.

However, for severe cases requiring hospitalization at tertiary or general hospitals, even for non-reimbursable treatments, the annual out-of-pocket maximum will be limited to 5 million won, thus expanding the coverage. No matter how expensive the treatment, the policyholder will only need to pay up to 5 million won. The current fourth generation has no such out-of-pocket maximum.

Coverage for reimbursable treatments has also been expanded. Notably, coverage for pregnancy and childbirth has been strengthened. While the fourth generation did not cover pregnancy and childbirth medical expenses even if they were reimbursable, the fifth generation will newly provide this coverage. Treatments with high out-of-pocket rates under the National Health Insurance, such as cesarean section and adhesion prevention agents, will also be covered by the fifth-generation indemnity insurance. From the fourth generation onward, items previously not covered under the reimbursable category in the first and second generations?such as anal, skin, dementia, mental illness, infertility, and obesity?are now partially or fully covered.

Switching Is Optional... Repurchasing Procedures to Begin in the Second Half

The financial authorities plan to announce a policy for contract repurchasing and strengthen the disclosure system for indemnity insurance to minimize confusion during the transition to the fifth generation. The contract repurchasing procedure will be carried out sequentially for about 20 million policyholders of late second-generation, third-, and fourth-generation products that have a renewal cycle. After announcing the contract repurchasing policy in the second half of the year, repurchasing will be implemented following the launch of the fifth-generation product. The authorities plan to offer an appropriate amount to about 20 million policyholders of previous generations who wish to switch to the fifth generation. Various options are being considered, including enhanced explanations and consultations, a cooling-off period, and guarantees of withdrawal and cancellation rights for repurchasing. Unconditional conversion to new products will also be allowed. Since the coverage for non-reimbursable items has been significantly reduced, the authorities plan to select key items in the second half of the year, establish dispute resolution standards, and then announce them.

The disclosure system will also be upgraded. Starting in the second half of the year, the Korea Life Insurance Association and the General Insurance Association of Korea will be required to disclose, based on 2024 data, each insurer's premiums, loss ratios, insurance profits and losses, and business expense ratios. According to the General Insurance Association, insurers currently disclose the premium increase rates and loss ratios for indemnity insurance over the past three years via the association's disclosure system, but do not reveal the profit and loss or business expense ratios for indemnity insurance relative to their overall insurance business.