The seventh-largest country in the world by insurance premiums, the South Korean insurance industry is highly competitive. At the end of 2020, life and non-life insurance premiums reached KRW221.9trn (approximately $95.7bn), up 4.3% from 2019. The insurance regulatory framework is a two-tiered supervisory system, with the Financial Services Commission (FSC) overseeing the insurance industry by implementing laws/regulations and policies to maintain stability in the market, monitor solvency of financial institutions and administering measures for consumer protection. The Financial Supervisory Service (FSS) executes the policies and handles day-to-day supervision as the ‘executive arm’ of the FSC, conducting investigations, compliance audits and enforcement.
Recent trends and issues
In response to Covid-19, the FSS urged insurers to honour claims made under insurance contracts subject to their terms and conditions. However, insurers included in their property cover a typical pandemic exclusion while also relying on the absence of ‘physical damage’ as a prerequisite to claims. Under severe economic conditions, insurers did see a rise in fraudulent claims of 10% to a record high of nearly 48,000 claims for personal lines insurance.
While many businesses suffered financially, insurers have reported positive revenues at the close of 2020. Life insurers reported an increase in net profit of 10.9% to KRW3,454.4bn, due to decreased guarantee reserves and increased sales of savings-type products. Non-life insurers also reported an increase in net profit of 8.1% to KRW2,626.2trn, due to improved loss ratios and a reduced number of claims, especially in auto insurance.
IFRS-17 and K-ICS
South Korean insurers continue their efforts to implement of the International Financial Reporting Standards 17 (IFRS-17) with new principle-based accounting rules for the insurance industry, promulgated by the Insurance Accounting Standards Board. These rules focus on the accounting treatment of insurance contracts involving the measure to the present value of the insurance contract. Implementation has been delayed, but on several occasions but is now set to take effect on 1 January 2023. Insurers will continue to unload assets and debts under an enhanced accounting scheme under IFRS-17, requiring greater capital to maintain solvency levels.
In addition, the FSC/FSS will implement its country-specific accounting rules known as the Korea Insurance Capital Standards (K-ICS). A key implication of K-ICS are changes to ‘capital charges’ that correspond to different investments and assets in an insurer’s portfolio. In response, insurers are divesting their real estate, given the higher ‘capital charges’ and falling prices. In addition, insurers are aggressively diversifying and shifting investments to alternative options with lower ‘capital charges’ to help maintain risk-based capital solvency margins (statutorily fixed at 100% but recommended at 150%). As a result, insurers are focusing on higher yields in domestic and offshore long term bonds, including infrastructure debt.
The Financial Consumer Protection Act (FCPA) – enacted on 25 March 2021 – seeks to promote greater protection of consumers of financial products, including insurance under the existing regulatory framework. The FCPA establishes a common regulatory system with the establishment of a common regulatory system for financial institutions, including the Financial Investment Services and Capital Markets Act, the Banking Act, and the Insurance Business Act (IBA), which is the main body of law for the business of insurance.
The FCPA builds on the IBA and enhances consumer protection with (i) more detailed compliance requirements to avoid mis-selling of insurance products (such as the provision of prior notifications and explanations to customers on the terms and conditions); (ii) strengthened sanctions for non-compliance under the laws/regulations; and (iii) an improved consumer remedial system. More specifically, the duty to explain, the principle of conformity, and other provisions under the IBA have been deleted which are now provided for under the FCPA. Under the FCPA, compliance has ‘more teeth’ allowing consumers to make claims for damages against insurers, who now bear a greater burden of proof. In the past policyholders/insureds had to prove such damages, which made it historically challenging for them to prevail against insurers. Moreover, the right to cancel illegal insurance contracts in favour of the policyholders/insureds did not exist under the IBA is now available under the FCPA and insurers are unable to request or retain any fees, penalties, etc under such post-voided insurance contracts.
In recent years with the concurrent growth of insurtech and fintech, the Korean insurance industry has made significant developments in insurance products and distribution. The FSC/FSS have been supportive and previously established a regulatory sandbox to allow start-ups and insurers to utilise new blockchain technology, artificial intelligence, the internet of things, big data, customer accessibility and mobility platforms as new tools and solutions, not only for insurers but for the benefit of the consumers. The regulatory barriers relating to data privacy and personal information protection have been and continue to be reviewed by the FSC/FSS with deregulation measures expected to further boost the market with insurtech tools and services. In fact, the Korean government streamlined the complex array of data protection and privacy laws in 2020 and established a central agency to manage this, known as the Personal Information Protection Committee. Lastly, new regulatory exemptions, such as for ‘MyData’ businesses, which allow financial institutions to share customers’ financial and personal information with government-approved third-party service vendors will further help insurers in product distribution and payment systems.
Over the course of 2020, insurers engaged in innovative insurance plans through mobile devices with investments and partnerships. The Lotte Group and Hyundai Fire & Marine invested KRW2bn (approximately $1.7m) with further commitments in Bomapp (a local start-up in mobile insurance management). The amount of domestic and foreign cash available with low interest rates for investment has additionally opened up greater opportunities in the Korean insurtech space.
Insurers delivery of healthcare services
The Korean government continues its deregulation in the provision of healthcare services by insurers. Recently, the FSC lifted restrictions to permit the delivery of health management services by insurers as an ‘ancillary business’, subject to certain reporting requirements and conditions under the IBA and its subordinate regulations. Any insurer owning and operating a healthcare management services company must comply with the Non-Medical Health Management Service Guidelines by the Ministry of Health and Welfare (MOHW). The FSC/FSS is permitted to (i) expand the scope of healthcare services, not only to existing policyholders/insureds but to prospective policyholders/insureds as well; and (ii) will further deregulate the compliance requirements in the use of ‘MyData’ businesses for the provision of healthcare services by insurers.