[VIEWPOINT]Insurance act revision is welcomeA few days ago, the proposed revision of the Insurance Business Act was made public in the press. This proposed revision is the first overall revision of the act in 25 years and in general it seems to faithfully reflect the changes in the market. Many might expect that the revision will ensure better and safer economic practices considering the basic guidelines of the plan, including the easing of regulations and more protection for insurance customers. However, I would like to point out some of the details that fall short of those expectations.
The first proposed revision in 25 years means that the insurance business act is behind the times, compared to other business acts. The failure to revise also points to negligence in the insurance market on the part of the government. It goes without saying that we need to constantly freshen our rules to give competitiveness to our insurance business in today's volatile markets, both domestic and abroad. Coming late as it is, alleviation of the overly strict regulations might be a welcome thing for the insurance companies. The proposal allows insurance companies to freely choose their operations, apart from specifically forbidden ones. Under the present act, insurance companies can only be allowed to perform certain assets operations found on a list. Other changes proposed are lifting the limit on ownership of securities and on loans while allowing more freedom in real estate ownership and foreign investment.
However, loosening the restrictions on assets operation will not work at all to bring a positive influence on the soundness of insurance companies. Should certain insurance companies increase their foreign investments and shares by a large scale with the purpose of raising the profitability of their assets, it would trigger changes in the markets within and out of the country that would in turn affect the financial affairs of the companies for the worse. With the financial affairs of the insurance companies in greater risk, the probability of bankruptcy would be greater and it would be the insurance buyers who would suffer the most from this, having to take the brunt of recklessness of insurance companies seeking higher profits. In other words, the alleviation of regulations on assets management might mean greater convenience to the insurance companies, but it would mean bigger sacrifices for the customers. In the case of several advanced countries, limits are set on the possession of high-risk assets, such as stocks and real estate, even while none are set for low-risk assets like national bonds and public loans. This is because the basic government regulations are set strictly in accordance to maintain financial soundness in order to protect depositors and insurance consumers. Our new insurance business act should also include similar limits to high-risk asset investments.
The provision in this proposal stating that obligatory insurance buyers would get all their money back in case of company bankruptcy might sound appealing to the consumers but this only stops at admitting that the existing protection mechanisms for insurance buyers are insufficient without solving the fundamental problems. This, to go back to the beginning, is part of a problem caused by the 1998 integration of all inspecting agencies in the financial field when all agencies protecting depositors and insurance buyers were uniformly lumped into the Korea Deposit Insurance Corp. This was a groundless decision that led to policies ignoring the respective characteristics of deposit and insurance. While ordinary deposits are made with the main purpose of getting back short-term payment settlements and normally do not exceed 10 million won ($8,000) per household, life or family insurance made to provide against unfortunate events is more of a long-term investment in which people normally spend 10 or even 100 times more than their deposits. However, the existing protection policy gives both depositors and insurance buyers equal compensation money of 50 million won in case a bank or insurance company goes bankrupt. This is hardly fair for the insurance buyers. Most of the states in the United States have a $100,000 limit on account coverage, while insurance buyers' limits are set at a far bigger amount of $300,000.
Despite my acknowledging the fact that it's always easier to complain about what's being done than doing it, I feel compelled to point out a few of these worrying details as an individual who is an insurance holder himself and as a member of society who wishes for the prosperity of our insurance business.
My wish is for my observations not to go unheeded and remind those making the finishing touches to the revision to remember for whom they are revising.
The writer is a professor of business administration at Sejong University.
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