The insurance reform committee, launched by financial authorities to reform the insurance industry, transitioned to a permanent system on the 11th after nearly a year of activities. The committee has promoted 74 tasks based on 10 major strategies, of which 23 have successfully been institutionalized. The remaining tasks will be pursued through separate discussion bodies. Kwon Dae-young, Secretary-General of the Financial Services Commission, noted during the final seventh meeting that "this is not the end but a halfway point; reforms can only be completed when results emerge on the ground."
While the insurance reform committee has achieved some success in enhancing consumer benefits, there are evaluations that increased regulations have heightened the burden on insurers. In particular, consumers have reacted strongly against the reform plan for real insurance, and with the accounting regulations (IFRS17) guidelines deteriorating the soundness of insurance companies, there are significant unresolved issues.
① Real insurance reform, how to address subscriber backlash
The most controversial effort led by the insurance reform committee has been the reform plan for real insurance. Financial authorities and the Special Committee on Medical Reform have concluded that real insurance subscribers are receiving excessive medical treatments, contributing to the deterioration of health insurance finances, and are pursuing a direction to reduce coverage by increasing the co-payment rate only for mild treatments. The intention is to reduce unnecessary medical usage. Reflecting this reform plan, a new real insurance (5th generation) with significantly increased co-payment rates is expected to launch in June next year.
The problem is that for the reform plan to succeed, subscribers of the 1st and 2nd generation real insurance (those who subscribed before April 2013) must be transferred to the new real insurance, which broadly guarantees mild treatments. However, there is no provision in the contracts of the 1st and 2nd generations requiring subscribers to rejoin the new real insurance after a certain period. Ultimately, financial authorities included the notion that they could consider a plan to forcibly transfer the 1st and 2nd generation subscribers to the 5th generation in the reform plan.
Subscribers of the 1st and 2nd generations are reacting strongly to this news. While the 1st and 2nd generations have broader coverage, their premiums are high. Due to high loss ratios, premiums increase significantly every three to five years. The reason for maintaining the contract while paying high premiums was to receive benefits from real insurance when reaching their 60s, when serious illness tends to begin. However, if they are forcibly transferred to the 5th generation, they will have only paid premiums without receiving any coverage.
Subscribers of the 1st and 2nd generations are criticizing that financial authorities have altered real insurance to suit the insurers' wishes. Although the reform plan has not yet been implemented, refusals to transition to real insurance and even the possibility of lawsuits are being raised. Financial authorities are reportedly considering the introduction of a buyback system that pays money to customers transitioning to the new real insurance, but there are many critiques about its efficacy. Moreover, the reform of real insurance is also facing backlash from the medical community, suggesting that the controversy is likely to continue.
② IFRS17 guidelines cause simultaneous decline in insurance company soundness
Through the 4th meeting in November of last year, the insurance reform committee pointed out that insurance companies have artificially set the cancellation rates of non-renewed and low-renewal products, inflating profits, and introduced the 'IFRS17 major critical assumptions guidelines.' Non-renewed and low-renewal insurance is a product that returns little or no refund to the insurer if the contract is canceled during the premium payment period. Financial authorities believe that as cancellations increase, insurers benefit by setting future cancellation rates high.
Financial authorities demanded that insurance companies apply the guidelines, which assume lower cancellation rates, starting from last year's year-end settlement of accounts. Consequently, the solvency ratio (KICS) indicator of insurance companies has declined uniformly. When cancellation rates are set low, the profitability indicator, known as the contract margin (CSM), decreases, thus reducing the insurance companies' capital and deteriorating their soundness indicators. A measure to prevent 'inflated performance' has led to a deterioration in insurance companies' soundness.
Samsung Life Insurance's KICS ratio plummeted from 219% at the end of 2023 to 180% at the end of last year. It is the first time that Samsung Life Insurance's KICS ratio has fallen below 200%. While insurance companies are attempting to increase capital through the issuance of new hybrid capital securities, they are experiencing a vicious cycle of having to bear interest expenses. As a result, financial authorities have included plans to refine the KICS system in this year's operational agenda.
The insurance industry is expressing skepticism about whether the financial authorities' guidelines are reasonable. Moreover, Lotte Insurance, which is seeking to divest, is reportedly considering ways not to apply the guidelines, making institutional improvements unavoidable.
③ The GA industry feels 'left out'… Delay in discussions on commission reform
Of the 74 tasks led by the insurance reform committee, about ten were related to enhancing the accountability of general agents (GAs). However, the GA industry did not occupy a single seat in the insurance reform committee and was not even given the opportunity to voice their concerns. It is known that the GA industry's absence from the insurance reform committee was not voluntary.
When financial authorities announced the commission reform plan, the GA industry declared a boycott, stating that they would not sell products from certain large insurance companies. The commission reform plan includes provisions for commission payments to be made in installments over a maximum of seven years, as well as disclosures of commissions received by agents. The GA industry is pushing back, asserting that the implementation of the reform plan would reduce agents' salaries (commissions).
After announcing the commission reform plan, financial authorities have established a separate task force (TF) to listen to the opinions of the GA industry. However, it is reported that differences have not been resolved. If the TF fails to find a consensus, collective actions from the GA industry cannot be ruled out.