[Contribution] Improvement in practices of insurance products

Changing deeply entrenched practices can be more difficult than expected, and requires strong will and tireless efforts. As there are still a lot of backward practices that need to be reformed, the FSS announced its second financial reform package and specific tasks last March, and has sought to deal with them.

Furthermore, the FSS will continue to identify practices that cause inconvenience and distrust among financial consumers, and strive to improve them effectively and efficiently.

Among the reform tasks included in the second financial reform package is improving practices for insurance products closely connected to everyday life and the details are as follows:

Firstly, irrational practices regarding mobile phone insurance are to be reformed. Thanks to the smartphone boom in 2011, mobile phone insurance became a popular product and the number of people who bought insurance for their handsets came to 7.74 million at the end of 2015. Still, there are some unreasonable practices. For example, loss ratios are different depending on warranty policies set by the manufacturer, but the same insurance standards are applied to consumers regardless of these loss ratios.

To correct this problem, the FSS will require insurance companies to apply segmented insurance rates based on the repair costs of each manufacturer. This improvement is to help consumers not to pay more than they should to have their phones repaired. In addition, to giving consumers greater choice, the FSS will ask insurance companies to sell plans which cover only accidental damage as well as the existing ones covering overall aspects -- loss, theft and accidental damage. Moreover, under the improved regulations, insurers should make contracts with affiliated repair centers and settle repair expenses afterward for consumers’ greater convenience.

Secondly, the FSS is looking to reform the car insurance system, in particular to improve rental service users’ rights and interests. As of the end of 2015, nearly 500,000 cars were registered as rental cars, but most rental agencies leave their cars uninsured against damage.

As a result, in the event of an accident, rental car users end up using the supplemental coverage that rental agencies provide at a higher price or are responsible for covering all expenses for repair.

Some drivers use rental services when their cars are under repair. Take for example a driver who has an accident with a rental car. Under current practices, insurance on the driver’s own car does not cover the damage to the rental car. As a result, the renter would be responsible for losses that the rental car’s corresponding insurance company does not cover.

When it comes to this, the FSS will encourage companies to develop special contract insurance plans to compensate the damage to rental cars at a low cost. It also plans to step up promotional efforts to increase the use of insurance plans some firms have already developed. The FSS will also urge insurers to develop additional special contract plans which automatically apply when a contract get signed, by the end of the year. This measure is to help drivers to be insured against rental car accidents at a low cost with insurance they have for their own cars. These insurance products will help drivers use car rental services in a safe and inexpensive way.

Thirdly, unreasonable practices regarding insurance for dementia are to be improved as well. Dementia has become one of the most common diseases in Korea where there is an ageing population. The number of dementia insurance sold reached 6.35 million at the end of 2015. However, some insurance companies set an age limit of 80 regarding the benefit period of their products, and this makes it difficult for patients to receive insurance benefits at the appropriate time. Furthermore, wrong information on insurance coverage causes damages to consumers. For example, some products which cover only severe dementia were depicted as if they cover all cases of the disease, which misleads consumers.

To address this problem and help consumers be insured effectively, the FSS will ask insurance companies to extend the benefit period of relevant products with consideration for the prevalence of dementia by age.

Moreover, the FSS will require companies to provide detailed explanations on the coverage and benefit period when they sell dementia insurance plans. If this reform effort goes as planned with success, people will be able to effectively prepare for dementia and damages to consumers caused by insurance misselling will decline.

Serving as a kind of social safety net provided by the private sector, insurance protects people against various risk factors and secures their safety and happiness. Financial regulatory authorities decided on the liberalization of insurance products in October last year. This is expected to prompt insurance companies to develop new and novel products which are closely connected to everyday life, such as the recently launched wedding insurance, drone insurance and voice phishing insurance.

The FSS will consistently encourage insurance companies to develop useful products in order for consumers to be insured against various dangers without difficulty. At the same time, the FSS will actively respond to consumer damage which newly developed products might incur. I hope that the concerted efforts of the insurance companies and the FSS to develop valuable products and reform practices will lead to good results and further contribute to providing insurance benefits to much more people.

By Kwon Sun-chan

The writer is a deputy governor of the Financial Supervisory Service. The views expressed here are his own. -- Ed.