South Korea: Insurance & Reinsurance (3rd edition)

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This country-specific Q&A provides an overview to insurance and reinsurance laws and regulations that may occur in South Korea.

This Q&A is part of the global guide to Insurance & Reinsurance (3rd edition). For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/insurance-and-reinsurance-3rd-edition

  1. How is the writing of insurance contracts regulated in your jurisdiction?

    Pursuant to the Insurance Business Act of South Korea (“IBA”), licensed insurers shall have “Basic Documents” in the Korean language pursuant to the Presidential Decree which include insurance business manuals, policies and methods of calculating premiums and liability reserves with Explanatory Materials and consent forms.

    Insurers are required to file a prior report to the Financial Supervisory Service (“FSS”) which include forms and rates (“File-and-Use”). File-and-Use procedures must be complied with for (1) insurance products expressly required to be filed for approval pursuant to law, (2) bancassurance products, and (3) insurance products pursuant to Presidential Decree for the protection of insurance policyholders. In the event that an insurance product does not fall under any of the foregoing conditions under the IBA, then the insurer may file a post-hoc report on a quarterly basis (“Use-and-File”).

  2. Are types of insurers regulated differently (i.e. life companies, reinsurers?)

    Life insurers and non-life insurers are generally regulated in the same manner in South Korea subject to varying standards and/or protocols accommodating for the differences in the manner in which the business of life insurance and non-life insurance are carried out.

    Reinsurers are less regulated and the FSS does not require the filing of reinsurance contracts except when the reinsurance premium is based on an investment income or the risk of the reinsurer is limited pursuant to the Insurance Business Supervisory Regulation. Reinsurers are, however, subject to various regulations regarding business delegation, data processing and information technology outsourcing, reinsurance reserving and intercompany transactions. Reinsurers are also guided by the Best Practices Guidelines for Reinsurance Management.

    See also, answer to Question 4.

  3. Are insurance brokers and other types of market intermediary subject to regulation?

    Under the IBA, persons who may solicit insurance include solicitors, brokers, agents and the executives or employees of an insurer either as a corporation or an individual. Registration with the FSC is required with a classification under (1) life insurance, (2) non-life insurance, or (3) accident & health insurance (e.g., personal injury, disease and hospitalisation insurance), but a person may be registered for all three areas if qualified. The general requirements are related to education/training, and work experience. A person who is declared to be incompetent; bankrupt; penalised heavier than under the IBA; imprisoned for criminal acts; had a prior registration revoked as a solicitor, agent or broker; or embezzled funds may be disqualified from registration.

  4. Is authorisation or a licence required and if so how long does it take on average to obtain such permission?

    An insurer or reinsurer must be authorised by the FSC to conduct the business of insurance in South Korea. Pursuant to the IBA, there are three general lines of business for which an Insurance Business License may be procured with the following sub-categories of insurance business: (1) life insurance (e.g., life insurance, pension insurance including retirement insurance and other types of insurance prescribed by Presidential Decree); (2) non-life insurance (e.g., fire, maritime, aviation, transportation, automobile, surety, reinsurance, and other types of insurance prescribed by Presidential Decree); and (3) accident and health insurance (e.g., personal injury, disease, nursing care, and other types of insurance prescribed by Presidential Decree). Also as previously noted, a reinsurer is licenced as a non-life insurer authorised to conduct the mono-line business of reinsurance.

    The authorisation process is divided into two phases which involves the securing of a Preliminary Licence and the subsequent procuring of the Final Licence. A conservative estimated timeline for both the Preliminary Licence and the Final Licence is 6 to 9 months excluding the time to prepare the applications and the entity formation with procurement of facilities, personnel, information technology, etc.

  5. Are there restrictions or controls over who owns or controls insurers (including restrictions on foreign ownership)?

    In South Korea, the Act on Corporate Governance of Financial Companies (“ACGFC”) together with the IBA are the main laws that are applied for the ownership and control of insurers. In particular from the insurance perspective, the ACGFC focuses on and defines “Large Shareholder(s)” whether domestic or foreign. As a Large Shareholder, there are qualifications, conditions and restrictions to be complied with when a subsidiary is formed for purposes of establishing a new insurer and reporting obligations in terms of any changes in control of the existing insurer such as disclosure of the shareholding relationship, sufficient investment capabilities, and other conditions as set out in the Enforcement Decree to the IBA. Any changes in control of an insurer require prior FSC approval who will undertake an examination of the eligibility of the Large Shareholder in accordance with the qualifications, conditions and restrictions under the ACGFC. In the event that the Large Shareholder fails to satisfy and/or maintain the legal requirements, then it shall promptly report the matter of deficiency or non-compliance to the FSC; otherwise, the Large Shareholder may be subject to administrative fines.

  6. Is it possible to insure risks in your jurisdiction without a licence or authorisation? (i.e. on a non-admitted basis)?

    Pursuant to the Enforcement Decree to the IBA, there are several situations where a person (i.e., a South Korean resident) may conclude an insurance contract with a foreign insurer (e.g., a non-admitted, unauthorised or unlicensed insurer). For example, a person may enter into an insurance contract with a foreign insurer for import/export cargo, aviation, travel, hull, long-term accident, or reinsurance and other exceptions as stated under the Enforcement Decree. The foregoing may only be marketed and sold through means of mail or by telephone, facsimile or over the internet and may not use insurance solicitors, agents, brokers, or employees of any authorised insurer pursuant to the Insurance Business Supervisory Regulation to the IBA. Foreign reinsurers may conduct marketing and sales with a registered reinsurance broker and in no event shall the cession exceed ninety percent (90%) of the entire underlying risk.

  7. What penalty is available for those who operate in your jurisdiction without appropriate permission?

    In accordance with the IBA, insurers who conduct the business of insurance without authorisation with an Insurance Business Licence duly issued by the FSC shall be punishable with a fine of up to KRW 50 million and imprisonment of up to five (5) years

  8. How rigorous is the supervisory and enforcement environment?

    The FSC as the executive branch and the FSS as its executive arm rigorously supervise licensing, solvency, marketing and solicitation, underwriting and claims processes, etc. through examinations and periodic and/or special audits. The regulatory authorities strictly apply all aspects of the IBA and its subordinate regulations and decrees to insurers, reinsurers, agents, brokers, etc. The Korea Fair Trade Commission (“KFTC”) promotes consumer protection while seeking to eliminate anti-competitive behavior in relation to insurance rates and premiums, price-fixing and agreements between and among market participants.

    Since 2018, the FSS continues to handle complaints made to various life insurers who allegedly mis-sold immediate annuities where holders of the annuities argued certain deposit amounts were wrongfully withheld at maturity. Also, since last year, there are a number of KFTC investigations related to bid-rigging allegations involving insurers and brokers.

  9. How is the solvency of insurers (and reinsurers where relevant) supervised?

    The criteria of the Risk-Based Capital Ratio (“RBC Ratio”) requirements for all authorised insurers is one hundred percent (100%) pursuant to the IBA which is based on the adoption of the solvency regime from the European Union based on the ratio of the prudential and financial soundness of insurers. The RBC Ratio is the ratio that an insurer shall maintain in excess of its liabilities as solvency surplus against future payments and other contingent liabilities. The Statutory RBC Ratio is the minimum ratio which the South Korean regulatory authorities promulgate from time-to-time for insurers to meet their liabilities as accounted for on their accounting books.

    In practice, the RBC Ratio is unofficially benchmarked at one hundred and fifty percent (150%) and in the event that the ratio falls below that percentage, then the FSS will notify, monitor and/or require corrective measures to be taken by the insurer to improve its solvency.

    Recently, Korean Insurance Capital Standard (“K-ICS”) has been announced for implementation on 1 January 2022 which will replace the RBC Ratio requirements and is based on the regime of Solvency II of the European Union and International Capital Standards as promulgated by the International Association of Insurance Supervisors. Along with introduction of IFRS-17, K-ICS is expected to have a significant impact on the insurance regulatory environment and the insurance industry in South Korea.

  10. What are the minimum capital requirements?

    The minimum capital amount of an insurer subsidiary is KRW 30 billion while a branch office of a foreign insurer must have minimum operating funds of KRW 3 billion. The foregoing are minimum amounts and additional amounts for additional lines of business may be required. Other recent sources state that the FSC will permit minimum capital of KRW 1-3 billion for certain monoline licences where less capital is needed.

  11. Is there a policyholder protection scheme in your jurisdiction?

    Policyholder protection is available as a consequence of dissolution or liquidation of an insurer.

    In the event of a transfer of insurance contracts, the IBA provides for procedural requirements to protect policyholders through a limited but fixed public notice period with the opportunity to raise questions and/or objections to the transfer. In the event that ten percent (10%) or more of the policyholders object, then the transfer may not be made to another insurer.

    Under the Korean Depositor Protection Act, the insured financial services companies, including insurers, participate and pay premiums to a guarantee fund managed by the Korea Deposit Insurance Corporation. In this regard, there is a policyholder protection pursuant to the foregoing where policyholders may seek claim proceeds and return premiums of up to KRW 50,000,000 for all claims made to a single life insurer or non-life insurer that is in insolvency proceedings including those related to automobile insurance.

  12. How are groups supervised if at all?

    The Financial Holding Companies Act of Korea (“FHCA”) regulates financial holding companies (“FHC(s)”) whose primary business is to control companies engaged in financial services businesses and other companies that are closely related to the operation of financial services businesses including insurers.

    The FHCA covers matters from formation and operations as a FHC including its sound management including but not limited to asset requirements, restriction on FHC ownership, required approval for establishment of subsidiaries, and supervision through audits. The transfer of risks and excessive expansion of control and protection of rights and interests of financial services consumers and other relevant third parties are also regulated by the FHCA to ensure competitiveness in the financial services industries and the sound development of the national economy.

  13. Do senior managers have to meet fit and proper requirements and/or be approved?

    The ACGFC also regulates “Executive Officers” of an insurer. The specific qualification requirements of Executive Officers under the ACGFC include background requirements that the individual has not declared bankrupt and has not being sentenced to a suspension or imprisonment without labor or heavier punishment. Upon the appointment of an Executive Officer, an insurer shall publicly disclose the appointment of the Executive Officer and his/her qualifications on its website, company materials, etc. and shall report same the FSC.

    An insurer shall appoint at least one (1) person to oversee its compliance with internal control standards, investigate violations of the standards, and take charge of general affairs related to internal control as a “Compliance Officer”. The Compliance Officer is appointed among inside directors or operational officers as an executive of the insurer. Furthermore, the same requirements shall similarly apply to the appointment, dismissal, term of office, etc. of a Risk Manager of an insurer.

  14. Are there restrictions on outsourcing parts of the business?

    The ACGFC also regulates “Executive Officers” of an insurer. The specific qualification requirements of Executive Officers under the ACGFC include background requirements that the individual has not declared bankrupt and has not being sentenced to a suspension or imprisonment without labor or heavier punishment. Upon the appointment of an Executive Officer, an insurer shall publicly disclose the appointment of the Executive Officer and his/her qualifications on its website, company materials, etc. and shall report same the FSC.

    An insurer shall appoint at least one (1) person to oversee its compliance with internal control standards, investigate violations of the standards, and take charge of general affairs related to internal control as a “Compliance Officer”. The Compliance Officer is appointed among inside directors or operational officers as an executive of the insurer. Furthermore, the same requirements shall similarly apply to the appointment, dismissal, term of office, etc. of a Risk Manager of an insurer.

  15. How are sales of insurance supervised or controlled?

    The IBA sets out various requirements and restrictions with respect to the sale of insurance including (1) the duty to explain material and important terms and conditions such as premium, coverage, claims procedures, etc.); (2) prohibition on providing false information and requesting the customer to terminate, non-renew, or cancel an insurance contract as inducement for another insurance product; (3) promise to pay special benefits including discounts, rebates, or other consideration; and (4) engaging in un-registered solicitors with the payment of commissions or other consideration.

    Insurers may engage in telemarketing sales of insurance directly or through an agent subject to (1) the consent of the customers; (2) preparation of a standard script with product explanations which telemarketers shall comply with in telemarketing with prospective customers; (3) recording complete telephonic communications and retention of same in accordance with the record retention requirements; and (4) conducting compliance control checks on twenty percent (20%) of all insurance contracts concluded through telemarketing. Solicitation through the television, radio, as well as the internet may be conducted on the condition that insurers provide explanation on material and important terms are provided on the medium similar to that which must be explained in face-to-face solicitation above, but must be readable and presented in a way so that the potential customer may understand such terms and conditions.

  16. Are consumer policies subject to restrictions? If so briefly describe the range of protections offered to consumer policyholders

    The IBA and the Act on the Establishment, etc. of Financial Services Commission (“AEFSC”) of South Korea also regulate the marketing and sales of consumer policies. Pursuant to the IBA, an insurer shall be obliged to explain insurance policies to potential policyholders. The IBA sets out the principle of conformity and specifies matters to be observed in relation to the solicitation advertisements and insurance solicitation, cancellation, surrender, etc. using telecommunications service. See also, answer to Question 15. An insurer shall also indemnify customers for any loss arising out of the insurance solicitation as specified under the IBA.

    Consumers that have been aggrieved in the solicitation process may bring a consumer complaint directly to the FSS for attention and resolution.

    The AEFSC provides a dispute resolution process as between an insurer and policyholder where the Financial Disputes Mediation Committee ("FDMC") within the FSS is authorised to review, deliberate on and resolve matters at raised by customers.

  17. Are the courts adept at handling complex commercial claims?

    Many large commercial disputes including those involving complex claims coverage disputes are brought before the civil courts in South Korea including those involving foreign parties. The District Court is the court of first instance involving a trial on the facts and law. High Courts are empowered to review appeals on a de novo basis and any subsequent appeals can be raised to the Supreme Court.

    The South Korean judges are experienced in and have handled many insurance disputes involving complex commercial claims and there is a fair amount of South Korean jurisprudence on insurance claims disputes. Also, South Korean judges are occasionally guided by Japanese and German jurisprudence in some disputes since the IBA is based on Japanese and German insurance law, as well as case laws from the United Kingdom and the United States as needed. Litigation in South Korean courts will generally be fair and equitable with decisions handed down within 6 to 9 months for standard coverage disputes; however, some disputes may take longer due to the complexity of the coverage issues, a foreign party requiring translation/interpretation, necessity of witness testimony, as well as appraisal of damages proceedings.

  18. Is alternative dispute resolution well established in your jurisdictions?

    Arbitration is the main alternative dispute resolution mechanism used in South Korea to settle large and complex disputes. Parties commonly assign arbitration institutions applying their rules including those rules of the International Chamber of Commerce, Singapore International Arbitration Centre, the Hong Kong International Arbitration Centre as well as the Korean Commercial Arbitration Board which has gained recognition as another option for arbitration by contracting parties while selecting the venues in the respective countries. South Korea is a party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“New York Convention”) enabling an arbitral award to be recognised and enforced in South Korea and other countries that are parties to the New York Convention.

    Consumers of financial products may also mediate a claim with the FSS through its FDMC where they may seek remedies and damages against financial institutions (e.g., insurers, banks, securities firms, and asset management companies) that are subject to supervision by the FSC and the FSS. The FDMC will review and issue a Mediation Order which the parties may accept or reject. By 2017, an estimated 23,000 cases were in mediation with the FDMC.

  19. What are the primary challenges to new market entrants?

    The FSC, for several decades, has refrained from issuing new licences to insurers seeking a status quo with the current roster of insurers. However, in 2016, the FSC issued three new limited licences to Allianz Global Corporate & Specialty, Asia Capital Re, and Pacific Life Re to spur competition within the marketplace.

    The regulatory regime in South Korea still presents challenges for new entrants involving issues of data protection and privacy in relation to customer personal information, restrictions on distribution channels, insurer accounting methodologies requiring greater capital and reserves as well as difficulties in adjusting premiums. Notwithstanding, there is potential for new licences for other monoline insurers including reinsurers as there will be a need for the shifting or sharing of risks and liabilities given the increased capitalisation and reserving requirements under IFRS 17 and the Korea Insurance Capital Standards implementation set for 2022.

  20. To what extent is the market being challenged by digital innovation?

    Digital innovation in South Korea has progressed and the South Korean Government has implemented certain changes to existing laws/regulations in response to the rapidly changing business environment for the insurance industry.

    Previously, financial institutions including insurers were not permitted to save, store and process certain types of information on cloud servers pursuant to the Rules on the Supervision of Electronic Financial Transactions (“E-Finance Rules”). Effective 1 January 2019, the regulatory authorities have repealed all such prohibitions on the use of cloud servers, as long as the cloud servers are physically located in South Korea.

    The South Korean National Assembly passed the Financial Innovation Support Act (“FinISA”) on 7 December 2018 to spark the financial services industry in conjunction with FinTech products and services which took effect in March 2019. The FinISA is intended to lay the legal foundation to introduce a Regulatory Sandbox for innovative financial services, where FinTech firms test their new products and services without certain regulatory oversight pursuant to exemptions for a limited period of time. In-line with the Regulatory Sandbox and evolving Smart Cities in South Korea for FinTech businesses and other innovative start-up enterprises, the FSC also modified its rules to now allow the establishment and operation of FinTech and InsurTech subsidiaries by insurers.

    However, there still remain certain hurdles to overcome as the FSC and FSS find challenges in balancing consumer protection against plans for de-regulation including those related to data protection and privacy measures. A 2018 Innovation Task Force at the FSS led by Governor Suk Heon Yoon was empowered to simplify regulatory compliance for financial services companies while strengthening consumer protection; however, the Task Force was unable to find ways to de-regulate while compromising consumer interests which included initiatives for streamlined sales of insurance through telemarketing as well as home shopping distribution channels without requiring face-to-face interactions/transactions. The Innovation Task Force will continue to deliberate and debate on how a balance can be struck to accommodate the insurance industry while ensuring protection to consumers.

  21. Over the next five years what type of business do you see taking a market lead?

    On a global basis and locally, it is expected that there will be sustained economic growth, rising interest rates, with higher investment yields which will stimulate the insurance industry in South Korea. In this back-drop and in a high-penetration jurisdiction such as South Korea, a number of insurance products are in the spotlight and are expected to grow such as reinsurance to relieve burdens of IFRS 17 and the K-ICS implantation, cyber security insurance with a highly-connected country, supplemental health insurance in response to various regulatory changes to the insurer health insurance market, as well as niche markets for pet insurance with the ever growing number of pets and pet-owners and travel insurance with increasing number of South Korean business and leisure travellers.