Policy Insurance Faces Consecutive Neglect... Controversy Over Effectiveness of COVID-19 Insurance (Comprehensive)

Consideration of Adding Epidemic Coverage to Corporate Business Interruption Insurance
Low Subscription Rates for Existing Policy Insurances

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] As social demands grow to compensate self-employed and small business owners for economic losses caused by COVID-19 quarantine measures, the insurance industry is facing urgent pressure. While adding infectious diseases like COVID-19 to business interruption insurance that compensates for losses due to business suspension is being considered, doubts about its effectiveness are already being raised.

This is because as discussions in the political sphere about government-funded compensation for business losses gain momentum, the role of private insurance is inevitably shrinking.

Another concern is that most policy-based insurance products introduced to serve as a public social safety net in the private sector have been largely ignored by subscribers, resulting in low subscription rates. Overseas, there have even been rulings stating that administrative measures such as business suspension do not qualify as conditions for insurance payouts, and thus insurers have no obligation to pay claims.

According to the insurance industry on the 29th, the Korea Insurance Development Institute has begun discussions on developing business interruption insurance that also covers infectious diseases like COVID-19. Business interruption insurance is a product that compensates companies and small business owners for physical damages caused by natural disasters, fires, theft, and loss of income due to business suspension.

Until now, damages caused by infectious diseases were not covered, but considering quarantine measures, it is expected that a basic infectious disease risk assessment model will be developed and compensation expanded.

The problem is the low subscription rate. As of 2018, there were only 1,458 subscriptions to business interruption insurance, which is extremely low considering there are 6.25 million active businesses. This is because it is rare for businesses to subscribe annually to insurance for natural disasters or infectious diseases that are difficult to predict but can cause massive damage if they occur. This is a chronic problem of policy-based insurance.

Low Subscription Rates for Policy-Based Insurance... Issues of Overlapping Financial Support

Policy-based insurance products with a public interest nature, such as crop disaster insurance and wind and flood insurance, have been largely ignored by consumers.

As of the end of 2019, the subscription rate for crop disaster insurance was only 38.9%. Subscription rates for certain crops such as tea (9.3%), chili peppers (5.9%), grapes (5.3%), corn (3.4%), and mushroom crops (3.0%) were below 10%.

Crop disaster insurance, introduced in 2001 to alleviate management instability caused by natural disasters and to promote income and management stability for farmers and support stable reproduction activities, has seen stagnant subscription rates since reaching 30% in 2017.

Additionally, the effective subscription rate for wind and flood insurance, which covers home flooding and other damages, decreased from 22.06% in 2017 to 19.46% last year.

Although these policy-based insurances are subsidized by the government or local governments, lack of promotion, interest, and proper education about disaster insurance systems are cited as causes.

There are also variables that could reduce COVID-19 risk before the insurance is launched. The Development Institute expects the insurance to be launched no earlier than the end of this year. The government plans to start vaccinations next month, and the first domestically developed COVID-19 treatment by Celltrion is reportedly close to approval. This suggests that the spread of COVID-19 could significantly decrease before the insurance is launched.

In particular, both ruling and opposition parties are reviewing financial support measures for loss compensation for small business owners affected by COVID-19. If financial support is provided, the necessity of subscribing to insurance will inevitably decrease even if the insurance product is introduced.

Democratic Party lawmaker Kang Hoon-sik proposed the 'Act on Protection and Support for Small Business Owners,' which compensates the minimum wage and business rent by the state. In disaster situations, if the state restricts small business owners' rights to operate through gathering bans or limitations, it compensates the amount equivalent to the minimum wage and part of fixed costs such as business rent for the restricted period.

People Power Party lawmaker Hong Seok-jun also introduced a revision bill to the Infectious Disease Prevention Act that mandates compensation for losses incurred by self-employed individuals due to gathering restrictions for infectious disease prevention and establishes specific compensation standards.

An insurance industry official said, "Policy-based insurance to compensate for unexpected damages has its role," but added, "Ways to encourage insurance subscription must also be considered."

This content was produced with the assistance of AI translation services.