Korea to ban proportional payout insurance

Kim So-young, Vice Chairman of the Financial Services Commission, is speaking at the Insurance Reform Committee Meeting held at the Government Complex Seoul in Jongno-gu, Seoul, on the 16th. (Yonhap)

South Korea’s financial authorities unveiled plans to prohibit proportional payout insurance products due to concerns over overutilized medical treatments and the financial strain on the national health insurance system.

The announcement followed an insurance reform meeting on Monday, which was attended by the Financial Services Commission, the Financial Supervisory Service, and key stakeholders from academia, research institutions, insurance companies, and industry associations.

Proportional payout insurance policies provide increasing payouts as medical expenses rise, incentivizing moral hazards where policyholders may seek unnecessary treatments to maximize payouts within annual coverage limits. These products are often tied to coverage for cancer, brain and heart diseases, circulatory system treatments, and injury or illness care.

The plan to impose a complete ban on such products follows the persistence of irregular sales, despite financial authorities previously issuing administrative guidance to halt their sale. “These products risk encouraging excessive medical practices for higher payouts, worsening national health insurance finances and distorting the medical system,” an official said.

To enforce the ban, the authorities plan to revise insurance product screening standards in supervisory regulations. The revisions are expected to prohibit the creation and sale of policies that structure payouts according to annual medical expenses.

The meeting also addressed measures to ease enrollment in fetal insurance plans for expectant mothers carrying triplets or more, who currently face barriers due to the high risk of complications. Many insurers either reject applications or limit enrollment to pregnancies beyond 35 weeks. To alleviate this, underwriting standards will be revised by January 2025 to facilitate enrollment for multiple-birth pregnancies, although claims may still be denied if risks are present at the time of application.

In addition to these measures, the authorities focused on promoting sound financial management among insurers. After the adoption of the IFRS 17 accounting standard in 2023, some insurers were found to inflate financial results by adjusting assumptions such as lapse rates. To address this, authorities plan to reform the differential deposit insurance premium system, rewarding insurers who maintain proper actuarial assumptions and rational sales practices.

Efforts to enhance customer protection were also discussed. The authorities plan to simplify, visualize, digitize, and standardize insurance product explanations, while strengthening the responsibilities of general agencies to provide clear product comparisons. To tackle improper policy replacement practices, enhancements to the comparison guidance system will include metrics like refund rates and assumed interest rates.

The authorities outlined steps to help policyholders claim unpaid insurance payouts. Insurers will be required to develop user-friendly inquiry and refund systems on their apps, while senior-friendly guidance documents will be introduced to ensure accessibility.