Entering the new century, diseases and industrial hazards threatening people’s health and the stability of family income have become various. And as the uncertainty on the security of life increases, people are getting more and more aware of the need for measures in preparation. As a result, more people are buying insurance and the statistics below shows how insurance premium per capita has increased through the year 2000~2006. In fact, insurance has become such a common issue among people these days in Korea, and this can be represented by how often insurance commercials are appearing on televisions. Insurance might seem simple in a sense that paying designated premium regularly guarantees a certain amount of benefit payment in case of an accident. However, considering how complicated insurance products usually are, insurance subscribers can suffer losses unintentionally due to the asymmetry of information. In regard to these potential losses, the Financial Services Commission (FSC) has recently made revisions to supervisory regulations on insurance businesses, which include adoption of cash-flow method and introduction of insurance with no cancellation refund and insurance which charges afterward-commission.
1. Adoption of Cash-flow Method
Formerly, insurance premium was calculated based on a simple numerical formula which horizontally considers just three elements (working expenses, risk ratio, and interest rate, which altogether were called as a three-element method). However, beside these three elements, cash-flow method takes into consideration every element which can influence future cash flows and derives an equation ‘(revenue-expense)/insurance premium’ in which insurance premium is decided at a certain level to meet the profit ratio. In fact, developed countries such as the U.S. and members of EU already adopted this cash-flow method, so this method is now a global trend. The FSC expects this newly adopted method to generate more creative insurance products because insurers now can take more elements than the former three elements into account. This in turn will promote competition between insurance companies, which will lead to lower prices and ultimately bring benefits to consumers.
As the cash-flow method allows insurance companies more discretion in developing insurance products, the FSC has reinforced companies’ duty to notify product details in order to guarantee customers’ right to select insurance products. According to FSC’s guidelines, companies must let customers know premium-to-expense ratio, which show how much of the premium the companies are actually using for their operation expense.
2. Introduction of Insurance Products with no Cancellation Refund
The overall concept for these products is that instead of receiving cancellation refund, customers pay lower insurance premium in the first place. These insurance products will be allowed only for non-investment insurance whose contract periods are less than 20 years. The expected outcomes of the introduction of these products are that customers can be prepared against uncertainties at lower prices (the FSC presumes that insurance premium will be 9.6% lower) and at the same time original role of insurance is enhanced because insurance-staying-customer ratio is increased.
Likewise in adoption of cash-flow method, the FSC came up with guidelines to guarantee customers’ right to select; insurance companies must explain that “these products do not provide cancellation refund” and suggest two options, products with and without cancellation refund, to customers.
3. Introduction of Afterward-commission Insurance Products
Lastly, the modifications in supervisory regulations on insurance business also include allowance for development of afterward-commission insurance products. Beforehand-commission insurance products, which were formerly the only form of insurance, deduct commission from premium before the premium is invested in asset management account. On the other hand, afterward-commission insurance products first invest premium in to asset management account then deduct commission through the insurance period. Because this afterward-commission method deducts less in early stages, investment profit ratio increases thus higher insurance money (lower insurance premium) is expected. FSC estimates approximately 4.5% of profit rate increase (in the fifth year) when applied by afterward-commission method.
These modifications of supervisory regulations on insurance business have been in effect as of April 1, 2010.