Why the Launch of 4th Generation Real Loss Insurance... "Top 10% Medical Users Swallow Half of Insurance Payouts"

Financial Services Commission Announces 'Revised Structure Plan for Indemnity Health Insurance Products'
Premiums Differentiated Based on Medical Service Usage
Maintaining Coverage and Limits While Aiming to Reduce Premiums by Up to 70%

[Asia Economy Reporter Ki Ha-young] The 4th generation indemnity health insurance, which charges premiums based on the amount of medical services used, will be launched in July next year. This aims to address the issue where excessive medical use by some policyholders has led to an overall increase in insurance premiums.

On the 9th, the Financial Services Commission announced the 'Indemnity Health Insurance Product Structure Reform Plan,' which includes the launch of this 4th generation indemnity insurance. While coverage and limits remain similar to existing indemnity insurance, the plan focuses on reducing premium burdens by up to 70% compared to current levels through measures such as a differentiated premium system for non-reimbursable services and adjustments to the deductible rate.

Top 10% of Medical Users Account for Half of Total Insurance Payments

The background for promoting the 4th generation indemnity insurance is the excessive use of medical services by a small number of policyholders due to moral hazard. As of the end of last year, 38 million people (including group insurance and mutual aid contracts) were enrolled in indemnity health insurance, serving as a private social safety net for citizens by covering medical expenses not covered by national health insurance.

However, indemnity insurance, first introduced in 1999, had structural limitations that could induce excessive medical service use, such as a 100% coverage structure with no deductible. Although the system has been continuously improved by raising deductibles and separating special contracts for some non-reimbursable over-treatment items like manual therapy and non-reimbursable injections, these efforts have been insufficient. Problems have persisted, including increased premium burdens on the majority of citizens due to excessive medical service use by a very small number of policyholders and a sharp rise in insurance companies' loss ratios.

In fact, a small number of policyholders with high medical usage receive more than half of the total insurance payments. According to the payment status of indemnity health insurance (standardized indemnity) for life and non-life insurance companies as of 2018, the top 10% of medical users received 56.8% of the total insurance payments. Meanwhile, 93.2% of all policyholders, including those with no claims, received less than the average insurance payment of 620,000 KRW.

Per Capita Insurance Payments Double from 160,000 KRW to 320,000 KRW in 5 Years

Furthermore, the rapid increase in insurance payments has led to a rise in the public's insurance premium burden. From 2014 to 2019, the average annual growth rate of insurance payments was 17.7%. During the same period, per capita insurance payments also recorded an average annual increase of 14.7%. The per capita insurance payment was 161,000 KRW in 2014 but nearly doubled to 321,000 KRW in 2019. The rise in per capita insurance payments results in increased per capita indemnity insurance premium burdens.

Insurance companies have also accumulated deficits due to excessive indemnity insurance payments, leading them to stop selling indemnity insurance or strengthen underwriting. From 2017 to the first half of this year, the cumulative loss of insurance companies from indemnity insurance reached 6.2 trillion KRW. Additionally, among the 30 companies that sold indemnity insurance, 11 companies (8 life insurers and 3 non-life insurers) had ceased sales as of the end of 2019.

A Financial Services Commission official explained, "If this situation continues, the public's medical expense burden will increase, and serious concerns about the sustainability of indemnity health insurance will arise. Therefore, we have decided to fundamentally reform the product structure of indemnity health insurance."

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