As the financial authorities' premium discount program for moving indemnity medical insurance policyholders to fifth-generation products is set to take effect in November, the insurers that will actually handle the conversions are taking a passive stance. The reasons are overlapping concerns over lower income from the discounts, reduced accounting profit and a possible rise in loss ratios.
According to the insurance industry on the 27th, the financial authorities will run a contract conversion discount program from November that cuts premiums for a set period when existing indemnity policyholders switch to the fifth generation. The authorities' idea is to move policyholders to fifth-generation products with a changed coverage structure to curb excessive treatment and lay the groundwork for indemnity insurance to be sustainable. If policyholders of the first and second generations, which carry high premiums, switch, the burden on policyholders is expected to ease over the long term and the claims payment structure to improve.
But many insurers say the burden they must take on immediately is heavier. When first- and second-generation policyholders move to the fifth generation, insurers must cut 50% off the changed premium for three years. As the number of conversions grows, the pool of discount recipients swells with it, and the drop in premium income can also widen.
The difference is clear in a simulation released by the Financial Services Commission. A woman in her 60s with a first-generation policy who had been paying 178,489 won a month would pay a monthly premium of 42,539 won after moving to the fifth generation. Adding the 50% conversion discount for three years brings it down to 21,270 won, 88.1% less than before. Policyholders greatly lighten their burden, but insurers must accept a corresponding fall in income.
A drop in income also weighs on the books. Under IFRS17 (the new accounting standard), the contractual service margin (CSM) is an indicator of the profit an insurance contract is expected to deliver in the future, calculated by reflecting premium income, expected claims and operating expenses. If premiums fall sharply, the future profit that can be expected from contracts declines, so net profit and various soundness indicators are bound to fall.
The worst case insurers cite is one in which only relatively healthy policyholders who visit hospitals less often switch to the fifth generation to save on premiums, while policyholders who visit hospitals often and file many claims remain in their existing contracts. In that case, only policyholders with a heavy claims burden would be left in first- and second-generation contracts, and the loss ratio could worsen further. That is the backdrop to criticism that cutting premiums alone will not be enough to drive conversions.
An official at a non-life insurer explained, "Considering the current conversion terms, premium income from existing generations of insurance is far more favorable for insurers that sell indemnity policies," adding, "And if we push conversions too hard and only customers with low medical usage switch while those with high usage stay in earlier generations, that is the worst case for insurers."
The need to commit separate staff and costs to recommending conversions is also an obstacle. Explaining to policyholders how product structures and coverage differ by generation, and what is advantageous or disadvantageous about switching, means higher costs for consultation and contract management. Unless insurers are convinced that conversion leads to better profitability, there is no reason for them to take the initiative, the argument goes.
An official in the non-life insurance industry said, "Because premiums are being cut by half for three years to raise the fifth-generation conversion rate, the burden has instead grown," adding, "From an insurer's standpoint, the more it encourages conversion, the more likely premium income is to fall immediately, and if it also has to commit related staff and costs, there is little incentive to step up actively."