FSC Establishes Fifth-Generation Indemnity Insurance Design Standards to Reduce Non-Severe Non-Covered Benefits

Legislative Notice Issued for Amendments to the Insurance Business Act
Strengthening GA Management System and Introducing Basic Capital Regulation

The Financial Services Commission announced on January 15 that it has established product design standards to reduce non-covered benefits in the fifth-generation indemnity health insurance products, which are scheduled for release in the first half of the year. The commission also plans to strengthen the management system for sales channels such as corporate insurance agencies (GA) and introduce a regulation on the basic capital solvency ratio (K-ICS), aiming to enhance the quality of insurers' capital.

On this day, the Financial Services Commission pre-announced legislation for the enforcement decree and supervisory regulations of the Insurance Business Act, reflecting these measures.

First, the design standards for the fifth-generation indemnity insurance products have been established to reinforce coverage for universal and severe medical expenses. The coinsurance rate for covered outpatient medical expenses will be linked to the National Health Insurance. The coinsurance rate for covered inpatient care will remain at 20%, the same as the current fourth-generation products, considering that inpatients are often seriously ill and the risk of abuse is low.

For non-covered medical expenses, special contracts will be managed separately for severe and non-severe cases. Coverage for severe cases will be strengthened, while coverage for non-severe cases will be reduced. This aims to curb excessive medical shopping incentives.

The management system for sales channels such as GAs and corporate insurance brokers will be reinforced. The plan is to enhance the accountability of insurance sales channels, including GAs, by introducing internal control systems, ensuring the effectiveness of sanctions, and expanding information disclosure.

Specifically, a management system for GA headquarters and branches will be established, and detailed procedures will be regulated to ensure compliance with internal control standards.

To improve the liability capacity of GAs, the required business guarantee deposit will be raised. The transfer of contracts for the purpose of evading sanctions will be prohibited to promote soundness in sales channels. Additionally, information on insurance planners, including contract retention rates, will be provided directly to consumers through application forms and insurance certificates.

Furthermore, as the market for corporate insurance brokers has grown, especially in general non-life insurance, specific internal control guidelines will be established for these brokers, and disclosure items will be expanded by applying disclosure cases from large GAs.

The basic capital K-ICS ratio will be introduced as a financial soundness standard for insurers to encourage active management. Since the implementation of the new solvency regime in 2023, there has been an increase in capital management focused on subordinated bond issuance in the insurance sector, while management of the basic capital ratio has been neglected.

According to the Financial Services Commission, the basic capital K-ICS ratio of insurers fell from 144.9% at the end of March 2023 to 113.2% at the end of June last year, a decrease of 31.7 percentage points, which is below the supervisory authority's recommended level of 130%.

The commission explained that it has prepared a two-track system improvement plan: relaxing K-ICS regulatory standards such as the requirements for early redemption of subordinated bonds, while introducing the basic capital ratio as a mandatory compliance standard. This amendment is being pursued as a follow-up measure to that plan.

In addition, the scope for simplifying explanations when concluding insurance contracts through telemarketing (TM) channels will be expanded. This is expected to improve inefficiencies, as one-sided non-face-to-face explanations previously took about 40 minutes to an hour. Legal revisions will also be made to establish order in insurance solicitation, such as clarifying the criteria for similar contracts used in comparison guidance systems to prevent improper policy replacements (switching).

The Financial Services Commission plans to conduct a pre-announcement of legislation and regulatory changes from today until February 25. Afterward, the amendments are expected to be finalized in the first half of the year, following reviews by the Regulatory Reform Committee and the Ministry of Government Legislation, as well as deliberations by the Vice Ministers' Meeting and the Cabinet.

An official from the Financial Services Commission stated, "We will continue close supervision and market monitoring to ensure the insurance industry can adapt smoothly to the improved system."