[Reporter’s Notebook] Stop Addressing Problems After the Fact... Insurance Product Gaps Must Be Minimized from the Design Stage

It's Too Late to Fix Things After the Sale
The Reason Indemnity Insurance Has Reached a Fifth Generation
Initial Design Matters More Than Catching Problems Later

"When developing insurance products, it is essential to thoroughly consider the potential for misuse from the outset. It is not enough to simply blame policyholders' moral hazard or insurance fraud after a problem has already occurred."

A financial industry official interviewed during recent coverage of the excessive use of insurance products advised that insurance companies must exercise great care in product design. In other words, they should not design products with generous coverage simply to boost sales, only to blame policyholders and attempt damage control when unexpected usage behaviors arise.

The importance of insurance design has grown as the domestic insurance market enters a phase of low growth and saturation, prompting insurers to seek new growth engines such as long-term care, pet, and climate insurance. The expansion of previously unavailable coverage options is undoubtedly positive for consumers. However, if companies rush to compete for first-mover advantage through aggressive coverage, they risk repeating similar problems.

Insurance is a product that can influence people's behavior, depending on the level of coverage. The history of indemnity insurance demonstrates this point. With each identified issue, insurers have adjusted coverage ranges and out-of-pocket costs, leading up to the launch of the fifth-generation product this year. While this progression can be seen as institutional evolution, it also indicates that insurers have continually had to make adjustments due to insufficient initial controls over emerging issues in earlier products.

Once an insurance product has been sold, making changes retroactively can be difficult. Insurers cannot arbitrarily revoke promised coverage simply because more claims have been paid out than expected. Over time, if some policyholders begin to overuse the coverage, payout amounts and loss ratios rise, increasing pressure to raise premiums. Ultimately, these costs may also be passed along to policyholders who use their insurance appropriately.

Potential avenues for misuse must be thoroughly considered at the product design stage. Insurers must examine whether the level of coverage encourages unnecessary use, whether policyholders could be incentivized to change their behavior to receive higher payouts, whether the criteria for payout are clear, and whether the product covers areas that are difficult for insurers to verify—thus increasing the risk of abuse.

From the insurers' perspective, offering new coverage can be an effective way to attract consumers. However, coverage that appears appealing at first may eventually become a source of disputes over insurance payouts as time passes. If individuals deliberately exploit loopholes in the product, this could even lead to insurance fraud. Therefore, it is crucial to minimize potential for excessive use at the product design stage, rather than responding only after problems arise. Sophisticated product design is needed that protects legitimate policyholders while reducing incentives for misuse. It is better to avoid building in vulnerabilities from the beginning than to later scramble to patch them.

This content was produced with the assistance of AI translation services.