[Financial Microscope] Fifth-Generation Indemnity Insurance Launch Imminent... Success Hinges on Conversion Measures for First and Second Generations

Fifth-Generation Indemnity: Lower Premiums and Differentiated Coverage for Severe and Non-Severe Treatments
Encouraging First- and Second-Generation Policyholders to Switch Is Key... Financial Deterioration Inevitable If Uptake Fails
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The fifth-generation indemnity health insurance is set to launch this April, or at the latest, within the first half of the year. The key features are lowering policyholders' premium burdens and differentiating out-of-pocket costs and coverage by classifying treatments as severe or non-severe. The success of the fifth-generation indemnity product will depend on the structure of contract buybacks and optional riders, which the financial authorities are currently preparing to introduce.

Fifth-Generation Indemnity Insurance Likely to Launch in April... Differentiated Coverage for Severe and Non-Severe Treatments

According to the financial sector on January 14, financial authorities and insurance companies are finalizing the details of the fifth-generation indemnity insurance, aiming for an April launch. The basic framework of the fifth-generation product was already announced in April last year. However, disagreements between the authorities and insurers over compensation methods to encourage first- and second-generation policyholders to switch, as well as which non-reimbursable items will be excluded from coverage, could delay the launch. The industry expects the fifth-generation product to be available within the first half of this year at the latest.

Compared to the fourth-generation, premiums for the fifth-generation indemnity insurance will be 30% to 50% lower. Instead, non-reimbursable items will be classified as severe or non-severe: severe cases will be covered as much as possible in line with existing policies, while non-severe cases will see higher out-of-pocket rates and reduced coverage. Non-reimbursable coverage for severe conditions such as cancer, cerebrovascular, and heart diseases will be similar to the fourth-generation, but the annual out-of-pocket maximum for hospitalizations at university or general hospitals will be capped at 5 million won, offering greater benefits than the fourth-generation. For non-severe, non-reimbursable items, the out-of-pocket rate will rise from the current 30% to 50%, and the annual reimbursement limit will decrease from 50 million won to 10 million won, reducing benefits. Outpatient treatment will have a daily limit of 200,000 won, and some items prone to overtreatment, such as manual therapy, will be excluded from coverage.

When the fifth-generation product is launched, second-generation (post-April 2013), third-generation, and fourth-generation policyholders will be automatically re-enrolled into the fifth-generation plan. First-generation and early second-generation policyholders who do not have a contract renewal clause can choose whether to switch to the fifth generation. These legacy policyholders account for 15.82 million contracts, or 44% of all indemnity insurance holders. If a large number of these policyholders do not switch, it will be difficult to address financial leaks in indemnity insurance. To address this, financial authorities are preparing measures for insurers to pay compensation to existing policyholders and encourage contract conversion.

Insurance Companies' Indemnity Losses Snowball... Indemnity Premiums to Rise 7.8% This Year

Known as the "second national health insurance," indemnity health insurance has accumulated annual losses of over 1 trillion won due to medical shopping and overtreatment. According to a new disclosure by the General Insurance Association of Korea at the end of last year, as of 2024, 13 domestic non-life insurers recorded a total indemnity insurance loss of 1.4822 trillion won. The third-generation product posted the largest loss at 730.8 billion won, followed by the fourth generation (317.6 billion won loss), first generation (219.6 billion won loss), and second generation (214.2 billion won loss).

By insurer, Hyundai Marine & Fire Insurance recorded the largest loss among first- to fourth-generation indemnity products at 571.9 billion won. Meritz Fire & Marine Insurance (315.4 billion won loss), DB Insurance (207.1 billion won loss), KB Insurance (118.7 billion won loss), and Samsung Fire & Marine Insurance (107.3 billion won loss) also posted losses in the hundreds of billions of won.

The total number of indemnity insurance contracts reached 29.22 million. Hyundai Marine & Fire Insurance held the most contracts at 6.37 million, followed by DB Insurance (4.95 million), Meritz Fire & Marine Insurance (4.29 million), and Samsung Fire & Marine Insurance (4.13 million).

As losses continue to snowball, insurance companies have decided to raise indemnity insurance premiums by an average of 7.8% this year. The fourth-generation product, which has the highest loss ratio, will see a 20% increase, followed by the third generation at 16%, the second generation at 5%, and the first generation at 3%. The cumulative premium increase for indemnity insurance has exceeded 46% over the five years from 2022 to this year. For policyholders who rarely use indemnity insurance, switching to the fifth-generation plan with lower premiums could be a good alternative.

Fifth-Generation Indemnity Alone Is Not Enough... Additional Measures Needed to Control Non-Reimbursable Items

Financial authorities and the insurance industry are preparing various supplementary measures in addition to the fifth-generation indemnity product to prevent financial leaks. The most notable is the optional rider. This rider, which was a campaign pledge by President Lee Jaemyung, allows first- and second-generation policyholders to exclude unnecessary coverage and reduce premiums. Existing contracts are maintained, but non-reimbursable items prone to overtreatment, such as manual therapy, can be excluded to lower premiums. However, since this measure is premised on attracting first- and second-generation policyholders, it overlaps with the fifth-generation product, and its launch date remains undecided.

Measures to prevent indemnity insurance fraud will also be strengthened this year. The Financial Supervisory Service and the insurance industry will operate a "special reporting reward period" for eradicating indemnity insurance fraud from January 12 to March 31. Whistleblowers who are hospital or clinic staff will receive 50 million won, brokers 30 million won, and patients or other hospital users 10 million won. Rewards are paid if concrete evidence is provided that leads to an investigation and active cooperation with witness statements. The "insurance crime reporting reward" operated by the Korea Life Insurance Association and the General Insurance Association of Korea will also be paid in addition.

Experts unanimously emphasize that managing non-reimbursable items is essential to break the vicious cycle of rising premiums for honest policyholders caused by worsening indemnity finances. Health authorities plan to designate items with a high risk of overtreatment as managed benefits within the first half of this year. However, industry experts generally believe that this alone will not be enough to curb the rampant abuse of non-reimbursable items. Professor Yoo Joosun of Kangnam University’s Department of Law, Administration, and Taxation said, "The key to sustainable indemnity insurance lies in managing non-reimbursable items, and the Ministry of Health and Welfare must recognize that the increase in indemnity loss ratios is due to overtreatment at certain medical institutions and among specific patients." He added, "There is also a need to regulate false and excessive treatments and misleading medical advertisements through price controls on non-reimbursable items and management of medical institutions."