New law tackles insurance fraud

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New law tackles insurance fraud

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The usual advice for Korean drivers after getting into even the slightest fender bender is immediately go to a hospital, not for treatment per se, but for the insurance payment.

Such cases of insurance fraud are expected to decrease significantly after a law strengthening penalties for such practices went into effect Friday.

Until now, insurance fraud was treated equally to other types of fraud, which meant a person found guilty would face a maximum prison sentence of 10 years or a fine of up to 20 million won ($18,150).

Under the new law, the maximum prison sentence for insurance fraud will remain 10 years, but the maximum fine has been increased to 50 million won.

Such fraud cases include filing light cosmetic surgery as manual therapy covered by medical insurance or using auto insurance to make excessive repairs even on a light scratch.

The new law also penalizes those who have not actually followed through with insurance fraud but made an attempt. Those who frequently cite large amounts on claims will receive additional penalties.

The law passed the National Assembly in March, two years after it was first proposed. Lawmakers said it was necessary because insurance fraud has been growing rapidly.

In the first half of this year, insurance fraud cost the industry 348 billion won, a 12 percent increase from the same period last year.

When accounting for cases that that went undetected since 2014, the cost is estimated to be 4.5 trillion won, according to the Korea Insurance Research Institute.

The impact of insurance fraud has fallen on the laps of insurance companies’ clients, as the additional burden caused by such cases is estimated to be an average 230,000 won in additional insurance payments per household and 89,000 won per person.

“Until now, there has been leniency toward [insurance fraud] as the sentiment is that these people committed such acts out of desperation,” said Kim Young-san of the General Insurance Association of Korea. “But under the new, law people’s perception will change, and it will have the effect of preventing [insurance fraud].”

The financial authorities believe the new law will raise public awareness of the seriousness of damage caused by insurance fraud.

“Although it is difficult to say how long it will take, insurance fraud will shrink,” said Sohn Joo-hyung, director of the insurance division at the Financial Services Commission. “As insurance claims [made from insurance fraud] shrink, this will allow [insurers] to provide cheaper and more diverse insurance products.”

The new law stipulates that insurance claims can be held back if an insurance company has reasonable grounds for suspecting fraud. The company can report the claim to the Financial Services Commission or investigative institutions like police and prosecutors.

Cho Yeon-haeng, president of the Korea Finance Consumer Federation, said these measures could be used by insurance companies to cut back on legitimate insurance claims.

“There’s the possibility that clients could be forced to cut their insurance claims, or it could lead to legal disputes, after insurers raise suspicions of fraud,” Cho said.

The law’s use of the phrase “reasonable grounds” has been deemed ambiguous.

“There is a need to be careful in suggesting what kind of actions can be suspected of fraud using statistics and objectivity,” said Song Yun-ah at the Korea Insurance Research Institute.

If an insurance company holds back in paying out insurance claims, or refuses or reduces claims without specific reasons, the company then has to pay a maximum 10 million won fine.

Consumer protection agencies admit the 10 million won fine is not a small amount considering it is levied on each case, but they say it is still not rigorous enough of a penalty.

In accordance with the new law, the government is opening a consolidated system that allows insurance companies to view each client’s insurance credit information.


BY HAN AE-RAN [lee.hojeong@joongang.co.kr]

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