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, which is 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 commission issued a legislative notice for amendments to 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 outpatient medical expenses covered by the national health insurance will be linked to that of the National Health Insurance Service. The coinsurance rate for inpatient expenses will remain at 20%, the same as the current fourth-generation products, considering that most inpatients suffer from serious illnesses and the risk of abuse is low.

For non-covered medical expenses, riders will be operated 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 incentives for excessive medical shopping.

The management system for sales channels, including GAs and corporate insurance brokers, will be strengthened. The plan is to enhance the accountability of insurance sales channels, including GAs, by introducing requirements such as the establishment of 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 stipulated to ensure compliance with internal control standards.

To improve the liability capacity of GAs, the required amount of business guarantee deposits will be increased. The transfer of contracts for the purpose of evading sanctions will be prohibited to promote soundness in sales channels. Information on insurance planners, including contract retention rates, will be added to documents such as application forms and insurance policies provided directly to consumers.

In addition, for corporate insurance brokers, whose market size has recently grown especially in general non-life insurance, specific internal control guidelines will be established, and disclosure items will be expanded by applying the disclosure practices of 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, insurers have focused on managing capital mainly through the issuance of subordinated bonds, 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 by 31.7 percentage points, from 144.9% at the end of March 2023 to 113.2% at the end of June last year, dropping below the supervisory authority's recommended level of 130%.

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

Furthermore, the scope for simplifying explanations when concluding insurance contracts via telemarketing (TM) channels will be expanded. This is expected to address inefficiencies, as previously one-sided, non-face-to-face explanations took about 40 minutes to an hour. Legal revisions will also be made to establish order in insurance solicitation, including clarifying the standards for similar contracts used in comparison guidance systems to prevent improper policy replacement (churning).

The commission plans to conduct a legislative notice and regulatory change notice 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 plan to continue close supervision and market monitoring to ensure that the insurance industry adapts smoothly to the improved system."