Insurance & Reinsurance 2019 Comparisons

Last Updated January 25, 2019

Contributed By Kim & Chang

Law and Practice

Authors



Kim & Chang Kim & Chan’s market-leading insurance practice provides for a wide range of client needs, including the establishment and licensing of new business entities, general legal advice and assistance on regulatory compliance. It is also well known for its expertise in M&A in the insurance industry and insurance dispute resolution. The insurance practice consists of 30 members – including attorneys, Certified Public Accountants, tax attorneys, actuaries and former regulators – who assist with legal and regulatory compliance, regulatory audits, labour and employment matters, real estate issues, asset management, competition law, tax, litigation, business licence matters and M&A. Major Korean, American, European and Japanese insurance companies regularly seek the firm’s advice regarding their insurance and reinsurance business in South Korea. In addition, Kim & Chang provides structuring and regulatory advice on reinsurance agreements and advises on cross-border sales of offshore insurance products in South Korea by foreign insurers. The firm represents clients in litigation and arbitration proceedings involving insurance claims, subrogation and other insurance-related disputes, and provides tax and HR advisory consulting for insurance businesses.

In Korea, there are three major laws that regulate the insurance and reinsurance business – the Insurance Business Law, the Korean Commercial Code and the Act on the Corporate Governance of Financial Companies.

The Insurance Business Law (IBL)

The IBL provides the statutory framework for the regulation of the insurance industry and addresses, among other things:

  • requirements for obtaining an insurance business licence;
  • insurance product regulation;
  • regulation of marketing practices, including bancassurance;
  • claims handling regulation;
  • asset management regulation;
  • prudential regulation, including capital adequacy requirements;
  • accounting regulation; 
  • examinations and fines/penalties/sanctions;
  • concurrent and ancillary businesses of insurers; and
  • closure, liquidation and policy transfers.

Financial regulatory bodies, such as the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), also promulgate regulations and guidelines as needed, including the Insurance Business Supervisory Regulation (IBSR), which sets forth the detailed requirements for conducting the insurance business in Korea. 

The Korean Commercial Code (KCC)

The KCC is the primary body of law that governs corporations and business transactions in South Korea, including insurance contracts. The chapter of the KCC related to insurance is composed of three major sections: i) general rules applicable to insurance contracts; ii) life insurance contracts; and iii) non-life insurance contracts.

Act on the Corporate Governance of Financial Companies (the Corporate Governance Act)

The Corporate Governance Act, which came into effect on 1 August 2016, was enacted to strengthen the corporate governance of financial companies, including insurance companies. The Corporate Governance Act establishes a set of uniform regulations on corporate governance issues (e.g., the ratio of outside directors to inside directors, qualification of officers, etc.) that were previously distinct for each financial sector. In particular, it introduced new rules requiring a periodic review of qualification of the major shareholders in the non-banking sector.

Insurance and reinsurance activities are mainly regulated by two regulatory bodies – the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS). The FSC is the central governmental policymaker setting policies for the securities, banking, insurance and asset management industries. The FSC has the authority to issue, suspend and revoke the business licenses of financial institutions. The FSS is the supervision and enforcement arm of the FSC and carries out the ongoing supervision and examination of all financial institutions in South Korea. Specifically, the FSS has the authority to conduct audits or examinations of financial institutions and to request documents, records and personal testimony necessary for such audits or examinations. If a financial institution commits a violation of a law or regulation, the FSC/FSS have authority to issue an order to dismiss the officers of the institution who are responsible for the violation and/or to suspend all or part of the business operations of such institution.

The following regulations are applicable to key aspects of the insurance and reinsurance business in Korea:

Entry Regulation

A foreign company intending to obtain a new insurance business licence must either incorporate a subsidiary or establish a branch office in Korea. A foreign company intending to incorporate a subsidiary must satisfy the following requirements to obtain an insurance business licence from the FSC:

  • Industry background: The foreign insurer (the applicant) seeking the approval of the FSC to establish a subsidiary must be a duly licensed insurer in its home country engaged in the same type(s) of insurance business as the Korean insurance subsidiary it intends to establish will engage.
  • Capitalisation: The applicant's shareholders’ equity must equal at least 300% of the amount of the contemplated capital contribution to be injected into the subsidiary.
  • Credit rating: The applicant should have a credit rating of at least investment grade, received from an internationally-recognised credit rating agency or should satisfy the relevant criteria for financial soundness of its home country regulator.
  • No history of sanctions: The applicant must not have been subject to any administrative sanctions equal to or more severe than an institutional warning or any criminal sanctions equal to or more severe than a criminal fine, in relation to the operation of its financial business imposed by the authorities of its home country during the most recent three years.
  • Adequate staffing and IT facilities: The subsidiary should be equipped with a professional workforce and IT facilities appropriate for the operation of its insurance business.

In the case of establishing and licensing a branch office in South Korea, requirements similar to those above apply.

Capital Requirements

The minimum required capital for an insurance subsidiary is KRW30 billion. However, the IBL provides that if an insurance company engages in limited insurance business lines, a different amount for each insurance business line to be engaged in would apply. A South Korean branch office of a foreign insurer must have minimum operating funds of KRW3 billion.

Acquisition of an Existing Insurance Company

A domestic or foreign entity intending to acquire 10% or more of the voting shares in a South Korean insurer is required to obtain prior approval from the FSC in relation to such proposed acquisition. To obtain such approval, the foreign acquirer would need to satisfy eligibility requirements similar to the requirements applicable when obtaining FSC approval to establish a new insurance subsidiary, such as industry background, credit rating and the absence of prior regulatory sanctions (as noted above).

Subsidiary Ownership

To hold more than a 15% stake in another company, insurers are required to obtain the FSC’s approval (or file a prior report to the FSS, depending on the type of business). There are certain restrictions on the types of companies insurers are allowed to invest in.

Risk-based Capital Adequacy Requirements

All insurers in Korea are required to maintain a ratio of regulatory capital to risk-weighted assets of not less than 100% in accordance with the risk-based capital adequacy requirements that the FSC implemented. Risk-based capital adequacy requirements require insurers to hold adequate capital to cover their exposure to interest rate risk, market risk, credit risk, operational risk and insurance risk by reflecting such risks in their calculation of risk-weighted assets. Insurers in Korea are required to calculate and report their risk-based capital adequacy ratios to the FSC on a quarterly basis. The regulatory authorities plan to introduce an enhanced capital regime called K-ICS by 2022.

Prompt Corrective Action

To prevent the insolvency of insurers and ensure sound asset management practices, the FSS may issue an order to take "prompt corrective action," which may include management improvement recommendations, management improvement requirements or management improvement orders if an insurer’s capital is found not to be adequate.

Regulation of Asset Management

The paramount objective of the asset management regulation under the IBL is to secure the safety, liquidity, profitability and public interest of the assets of insurers. The asset management regulation applicable to insurers is best described as a "negative system" (ie, the prohibition of non-business-purpose real estate holdings). In addition, the investment limit and its investment categories are subject to the following regulatory requirements (while a separate limit applies to the asset management of special accounts, the assets of a special account that are no greater than KRW30 billion per end of quarter are deemed to be included in the general account for the purpose of the calculation of an investment limit):

  • Credit extension to a person or a company – 3% of total assets.
  • Stock and bond investment in any single company – 7% of total assets.
  • Credit extension or stocks and bond investments to a person or a company (including related persons or companies) – 12% of total assets.
  • Sum of credit extension in excess of 1/100 of total assets of an insurer (applicable to the same person, company or the principal shareholders) – 20% of total assets.
  • Credit extension to a principal shareholder and a company that falls into the category of a subsidiary of an insurance company under the Presidential Enforcement Decree – the lesser of either 40% of the shareholders’ equity or 2% of the total assets).
  • Stock and bond investments to a principal shareholder and a company that falls into the category of a subsidiary of the insurer under the Presidential Enforcement Decree – the lesser of either 60% of the shareholders’ equity or 3% of the total assets).
  • Credit extension to the single subsidiary of an insurer – 10% of shareholders’ equity.
  • Real estate holdings – 15% of total assets.
  • Foreign currency or overseas real estate as defined under the Foreign Exchange Transactions Act – 30% of total assets (however, the foregoing limitation does not apply to situations where the foreign currency assets are in the same currency as the policy reserve pursuant to the insurer's insurance contracts).
  • Sum of margins (contract amount in case of over-the-counter (OTC) derivatives) of derivatives – 6% of total assets (less than 3% in case of OTC derivatives).

Reinsurance

With regard to reinsurance related regulations, in principle, insurers are exempt from the reserve requirement under the IBL to the extent its insurance policies are reinsured since the risk is deemed to have been transferred from the insurer to the reinsurer, provided that the following conditions are met:

  • The reinsurance transaction must involve the transfer of insurance risk;
  • There should be an actual risk of loss for the reinsurer; and
  • The reinsurer must satisfy the standards of financial soundness as decided by the authorities in its home jurisdiction or shall have had a credit rating of at least investment grade from a reputable international rating firm for the past three years.

Further, under Article 7-12 of the IBSR, insurers are required to file a report with the FSS for any reinsurance contract within one month from the execution of such reinsurance contract if:

  • the reinsurance premium under the reinsurance contract is calculated on the basis of an expected rate of return on investment; or 
  • the reinsurance contract provides for a limitation of liability on the reinsurance by way of reducing or removing the obligation of the reinsurer, granting the reinsurer a unilateral termination right or right to amend etc. the reinsurance contract; or
  • the amount to be paid by the reinsurer under the reinsurance contract is fixed, regardless of the occurrence of an insured event or cash flow, or if the reinsurance contract provides that the reinsurer may delay payment of the reinsurance claim beyond the usual settlement period.

In the case of reinsurance contracts not satisfying qualification requirements under the IBL, all revenues and expenses (i.e., premiums, claims, commissions, etc.) from such reinsurance transactions should be treated as deposits or advanced receipts. In such case, the exemption from the reserve requirement under the IBL for insurance policies that are reinsured would not be granted.

No information is available.

Insurance and reinsurance services are exempt from value added tax. Insurers and reinsurers who are domestic corporations or have a permanent establishment in Korea must pay corporate income tax and education tax on premiums.

Net taxable income is subject to ordinary corporate income tax, which is levied at (i) 11% (including surtax) for a tax base of KRW200 million or less; (ii) 22% (including surtax) for a tax base ranging from KRW200 million to KRW20 billion; (iii) 24.2% (including surtax) for a tax base ranging from KRW20 billion to KRW300 billion; and (iv) 27.5% (including surtax) for a tax base exceeding KRW300 billion.

Education taxes are earmarked for education. Education taxes are equal to 0.5% of total insurance business revenue (such as insurance premiums), after taking into account certain deductions (such as an increase in amounts set aside for policy reserves) and certain exceptions (such as reinsurance premiums).

Non-admitted foreign insurers and reinsurers are not generally subject to corporate income tax and education tax on premiums in Korea other than withholding tax on Korean-sourced interest, dividends and so on, unless they have a permanent establishment in Korea.

Korea does not have an insurance licensing or passporting regime for offshore insurers and Korean law generally prohibits Korean residents from purchasing insurance products from persons that are not duly licensed in Korea to engage in the insurance business (a non-admitted insurer), subject to certain exceptions specified under the IBL. Consequently, unless one of the below exceptions is applicable, offshore insurers desiring to sell insurance products to Korean residents must either establish a local branch or subsidiary in Korea and obtain a Korean insurance business licence for such entity, or acquire an existing licensed insurer in Korea.

Enumerated Exceptions

Article 7 of the Presidential Decree of the IBL lists eight types of insurance that Korean residents are expressly permitted to purchase on a cross-border basis from an offshore non-admitted insurer:

  • life insurance;
  • export cargo insurance;
  • import cargo insurance;
  • aviation insurance;
  • travel insurance;
  • hull insurance;
  • long-term casualty insurance; and
  • reinsurance.

The cross-border sale and purchase of these insurance products is permitted (the insurance products described above are referred to herein as expressly permitted products).

Article 7 of the Presidential Decree of the IBL also permits the sale of the following offshore insurance products to Korean residents, regardless of the type of insurance:

    1. any insurance product that is not sold in Korea;
    2. any insurance product which three or more domestic insurance companies have refused to underwrite; and
    3. any insurance product that was purchased in another country but has not expired upon the policyholder’s return to Korea (the expressly permitted products and the above are collectively referred to herein as permitted products).

Restrictions on Marketing Methods

Even if the sale of an insurance product is permitted under Article 7 of the IBL Decree, a non-admitted insurer selling such permitted products must comply with certain restrictions on marketing methods. 

According to Articles 1-6 of the IBSR, non-admitted insurers may sell permitted products only by mail, telephone, fax or over the internet. They may not use any domestic insurers, insurance solicitors, insurance agents or insurance brokers (except for reinsurance, which may be sold through domestic insurance brokers). Furthermore, officers or employees of non-admitted insurers may not engage in the execution or solicitation of insurance contracts in Korea.

With respect to the advertising of offshore insurance in Korea, Article 1-7 of the IBSR allows non-admitted insurers to advertise permitted products in Korea through newspapers, television, radio, magazines and over the internet, as long as they file a report with the FSS prior to advertising their products. The report should set forth the name and address of the non-admitted insurer’s head office and a description of the advertisement.

There is no express restriction prohibiting fronting under the IBL. However, the FSS recently announced an amendment to the IBSR, effective 1 January 2019, pursuant to which non-life insurance companies are required to retain at least 10% of the insurance risk of each non-life insurance contract (except auto insurance contracts), except where (i) the risk-management committee of the insurance company has decided otherwise or; (ii) the reinsurer cedes the reinsurance risk to a re-reinsurer (in the case of retrocession the retention requirement does not apply).

The M&A scene in the Korean insurance market had been active in the past. However in 2018 there was only one M&A transaction – Shinhan Financial Group’s acquisition of Orange Life (formerly known as ING Life) from MBK Partners, a private equity firm.

As Korea will introduce IFRS17 with mark-to-market accounting standards for insurance liabilities and strengthen the capital requirements for insurers from 2022, it is expected that some small or mid-sized insurers, especially life insurers, will be sold in the coming years.

Under the IBL, only insurance solicitors, insurance agencies, insurance brokers and executives or employees of an insurance company are permitted to engage in insurance solicitation.

Insurance Solicitor

An insurance solicitor is any person duly registered pursuant to the IBL that engages in facilitating the conclusion of insurance contracts for an insurance company, insurance agency or insurance broker. Each and every insurance company, insurance agency and insurance broker shall register any person who intends to be an insurance solicitor belonging thereto with the relevant life or non-life insurance association. None of the following persons may become an insurance solicitor (disqualified persons):

  • An incompetent or quasi-incompetent person;
  • A person declared bankrupt who is yet to be reinstated;
  • A person who has been sentenced to a fine or to heavier punishment under the IBL, and in whose case two years have not yet passed since the expiration of the term of sentence (including cases where the execution of such a sentence is deemed terminated), or since the decision to exempt such a sentence has been made;
  • A person who is currently on probation or serving a suspended sentence of imprisonment without labour, or heavier punishment, as declared by a court;
  • A person whose registration as an insurance solicitor, insurance agency or certified insurance broker under the IBL has been revoked, and in whose case two years have not yet passed since the date on which the registration was revoked;
  • A person who is subject to the disposition of revocation of his/her registration as an insurance solicitor, insurance agency or certified insurance broker under the IBL at least twice and in whose case three years have not yet passed since the date on which the final disposition of the revocation of registration was taken;
  • A person who was an executive or employee of an insurance agency or certified insurance broker that was subject to the disposition of fines for negligence or penalty surcharges but failed to pay them; or that was subject to the disposition of business suspension or revocation of registration under the IBL, and in whose case two years have not yet passed from the date on which the dispositions of fines for negligence, penalty surcharges, business suspension or revocation of registration was taken;
  • A minor who does not have the same capability as that of an adult in engaging in business and whose legal representative falls under the above seven points;
  • A corporation or an association or foundation other than a corporation that has an executive or manager falling under any of the above first seven points; and
  • A person who has appropriated premiums, loans or insurance proceeds that he/she has received in connection with the solicitation for any other purposes, and in whose case three years have not yet passed since the date on which he/she has appropriated such premiums, loans or insurance proceeds.

Insurance solicitors are classified into life insurance solicitors, non-life insurance solicitors and type three insurance solicitors.

The scope of life insurance solicitors' business shall be life insurance, pension insurance (including retirement insurance), and other types of insurance business prescribed by the Presidential Decree of the IBL. The scope of non-life insurance solicitors' business shall be fire insurance, maritime insurance (including aviation and transportation insurance), automobile insurance, surety insurance, reinsurance and other types of insurance business prescribed by the Presidential Decree of the IBL. The scope of type three insurance solicitors' business shall be injury insurance, disease insurance, nursing insurance and other types of insurance business prescribed by Presidential Decree of the IBL.

Persons desiring to register as a life/non-life/type three insurance solicitor require one of the following qualifications:

  • Have completed the training course for life/non-life/third area insurance solicitation;
  • Have at least one year of work experience in the relevant line of insurance business (life/non-life/ third area insurance) all within three years of the application date and completed the required education course; 
  • Have satisfied the requirements for registration as an individual life/non-life/type three agent (applicable only to the person who shall be the insurance solicitor of a corporate insurance agency); or
  • Have satisfied the requirements for registration of individual life/non-life/type three brokers (applicable only to the person who shall be the insurance solicitor of a corporate insurance broker).

There are some restrictions on solicitation by insurance solicitors as follows:

  • No insurance company may entrust an insurance solicitor belonging to any other insurance company with insurance solicitation.
  • No insurance solicitor may perform insurance solicitation for any insurance company other than the insurance company to which he/she belongs.
  • However, the first two points shall not apply in any of the following cases:
  • Where an insurance solicitor belonging to a life insurance company or an insurance company specialising in type three insurance business performs insurance solicitation only for one non-life insurance company;
  • Where an insurance solicitor belonging to a non-life insurance company or an insurance company specialising in type three insurance business performs insurance solicitation only for one life insurance company;
  • Where an insurance solicitor belonging to a life insurance company or a non-life insurance company performs insurance solicitation only for one insurance company specialising in type three insurance business.

Insurance Agency

Under the IBL, insurance agency means any person duly registered pursuant to the IBL to conclude insurance contracts on behalf of an insurance company. Insurance agencies shall be classified into individual insurance agencies and corporate insurance agencies, and each of them into life insurance agencies, non-life insurance agencies and type three insurance agencies.

Persons desiring to register as a life/non-life/type three individual insurance agent needs one of the following qualifications:

  • Have completed the training course for life/non-life/third area insurance agencies; or
  • Have at least two years of work experience in the relevant line of insurance business (life/non-life/third area insurance), all within four years of the application date and completed the required education course.

Requirements for registration of life/non-life/type three corporate insurance agencies are as below:

  • Have on its staff at least one individual who satisfies any of the qualifications for registration of life/non-life/type three individual insurance agent; and
  • In the case of a corporation that has not fewer than 100 officers and employees, not fewer than 10% of the total officers and employees must satisfy the requirements to become an insurance solicitor.

However, a person falling under the following may not become an insurance agent: i) a disqualified person; ii) a person registered as an insurance solicitor or certified insurance broker; iii) an executive or employee of any other insurance company, etc.; iv) a person who is deemed a disqualified person pursuant to foreign Acts and subordinate statutes; or v) a person prescribed by Presidential Decree of the IBL who is likely to engage in any unfair solicitation such as substantially restricting competition etc.

A corporate insurance agency having not fewer than 500 insurance solicitors shall satisfy all of the following requirements: i) it shall formulate a business guideline for the purpose of complying with statutes and protecting policyholders; ii) it shall have one or more executive officers or employees who shall inspect whether the business guideline is observed and investigate violations thereof; and iii) it shall be equipped with sufficient physical facilities, such as computer facilities etc., that are necessary for the protection of policyholders and the performance of insurance solicitation business.

Once registration is completed, in order to commence business operations an insurance agency must deposit an operation guarantee with an insurance company. The amount of the deposit is an amount as determined between the agency and insurance company within the limit of KRW300 million. The operation guarantee may be deposited in cash or a guarantee insurance policy may be deposited in lieu of cash. The operation guarantee deposit is returned when the agency contract between the insurance agent and the insurer is duly terminated or expired.

Insurance broker

Insurance broker means any person duly registered pursuant to the IBL to independently broker the conclusion of insurance contracts. Insurance brokers shall be classified into individual and corporate insurance brokers, and each of them shall be classified into life insurance brokers, non-life insurance brokers and type three insurance brokers.

Persons desiring to register as a life/non-life/type three individual insurance broker needs at least one of the following qualifications:

  • Have completed the required education course and passed the life/non-life/type three insurance broker examination;
  • Have at least two years of work experience as a (life/non-life/third area insurance) insurance broker, all within four years of the application date, and completed the required education course; or
  • Have passed the life/non-life/type three insurance broker examination and have at least two years of work experience as an insurance solicitor for a  corporate (life/non-life/third area insurance) insurance broker, all within four years of the application date and completed the required education course.

To register as a life/non-life/type three corporate insurance broker, one-third of the corporate insurance broker’s officers and employees should have passed a broker examination and work full-time for the corporate insurance broker.

No person who falls under the following may become an insurance broker: i) a disqualified person; ii) a person registered as an insurance solicitor or insurance agent; iii) an executive or employee of any other insurance company, etc.; iv) a person who is deemed to be a disqualified person pursuant to foreign Acts and subordinate statutes; v) a person prescribed by Presidential Decree of the IBL who is likely to engage in any unfair solicitation such as substantially restricting competition, etc.; and vi) a corporation with liabilities that exceed its assets.

There is no minimum capital requirement but, once the registration is completed, the applicant must deposit KRW300 million with the FSS as protection for policyholders before it commences its insurance brokerage operations. The cash deposit can be replaced by a guarantee insurance policy, listed securities or a bank guarantee having the same value as the cash deposit.

Bancassurance

Under the IBL, the following institutions may register as an insurance agency or an insurance broker: i) a bank established pursuant to the Banking Act; ii) an investment dealer and investment broker established pursuant to the Financial Investment Services and Capital Markets Act; iii) a mutual savings bank established pursuant to the Mutual Savings Banks Act; and iv) any other institution prescribed by Presidential Decree which is an institution engaged in  the financial business pursuant to other Acts (bancassurance agents).

The scope of insurance products that may be sold by bancassurance agents is currently limited to the following types of products:

  • Life insurance: i) personal savings-type insurance, such as personal pension, general pension, education insurance, endowment insurance; ii) credit life insurance; and iii) type three insurance among protection-type insurance; and
  • Non-life insurance: i) personal pension, long-term savings-type insurance, fire insurance (house), injury insurance (excluding group injury insurance), comprehensive insurance, credit non-life insurance; and ii) type three insurance among personal long-term protection-type insurance.

Bancassurance agents may sell insurance only by the following methods: i) face-to-face solicitation at designated places in the place of business of the relevant bancassurance agent; ii) solicitation to unspecified persons through the internet homepage of the bancassurance agent; or iii) solicitation by telephone, mail, computer communications etc.

Bancassurance agents may permit not more than two of their employees per office or branch who are registered under the IBL to engage in solicitation.

No person engaged in solicitation as a bancassurance agent shall deal with business likely to cause unfair solicitation, such as loans etc.

A bancassurance agent with total assets of not less than KRW2 trillion as of the end of the recent business year is prohibited from selling the insurance products of one particular life insurance company in excess of 25% of the total amount of the life insurance products sold (on a per annum basis); or selling the insurance products of one particular non-life insurance company in excess of 25% of the total amount of the non-life insurance products sold (namely the 25% Rule).

Pursuant to the regulations under the IBL, bancassurance agents are not permitted to receive additional payments as consideration other than the sales commission prescribed in the relevant agent agreement governing the bancassurance arrangement in relation to insurance solicitation. Further, the bancassurance agents themselves must bear all the costs relating to their insurance solicitation, such as marketing costs and promotion costs.

Under the KCC, if a policyholder or an insured fails to disclose or misrepresents material facts by fraud or gross negligence when entering into an insurance contract, the insurer may terminate the contract within one month after the insurer learns of the non-disclosure or the misrepresentation, or within three years of the date of the contract.  However, if the insurer knew, or would have known, such non-disclosure or misrepresentation but for its gross negligence, the insurer cannot terminate the contract (KCC Article 651). Even after an insured event occurs, an insurer should not be held liable for the insurance payment if the insurer could have terminated the insurance contract pursuant to Article 651. However, if it is demonstrated that the occurrence of the insured event was not affected by the non-disclosure or misrepresentation of material facts, the insurer would still be held responsible for the insurance payment. 

See 6.1 Obligations of the Insured and Insurer, above.

There are three types of intermediary – insurance solicitors, agents and brokers. Insurance solicitors (those who solicit insurance) are tied to a particular insurance company, insurance agency or broker. An insurance agent can either be tied to a particular insurance company or be independent. Insurance solicitors and agents act on behalf of an insurance company. However, insurance brokers are independent from insurance companies.

When entering into an insurance contract, an insurer and insurance intermediary must deliver copies of the insurance terms and conditions and explain important clauses to the policyholder. If they fail to provide appropriate explanations, the policyholder can cancel the contract within three months from the execution date. In addition, when executing or soliciting an insurance contract, an insurer and insurance intermediary are prohibited from, among other things:

  • making an untrue statement or an omission of an important matter to the policyholder or the insured;
  • failing to provide a clear basis of comparison with other insurance products; and
  • marketing the superiority of the insurance product by comparing it with other insurance products without objective grounds.

An insurance product is defined as a contract that stipulates the payment of money and other benefits to the insured on the occurrence of a contingency in exchange for consideration.

It is generally agreed that unless an insured has an insurable interest in an insurance policy, the insurance contract is null and void for non-life insurance while there is no such concept of insurable interest infor life insurance. Insurable interest is “any lawful and substantial economic interest in the safety or preservation of the subject of insurance free from loss, destruction or pecuniary damage.”

In making insurance contracts, the following clauses must be included:

  • Events that trigger the insurer's obligation to pay insurance benefits;
  • Events that render the insurance contract void;
  • Exemptions for the insurer's liability;
  • The scope and term of the insurer's obligations;
  • Losses suffered by the policyholder or the insured in the event of non-performance of their obligations;
  • Grounds for terminating all or part of the insurance contract and, if applicable, the rights and obligations of the parties;
  • The rights of the policyholder, the insured or the beneficiary to dividends or retained earnings;
  • Interest rates, performance calculation and disclosure methods, where the insurance benefits vary depending on the applicable interest rates or asset management performance;
  • Terms relating to deposit protection and protection of policyholders' rights; and
  • Other terms that a policyholder should be aware of as a material part of the insurance contract.

The foregoing is also applicable to the cases of multiple insureds or potential beneficiaries under the contract. There is no difference with regards to consumer contracts or reinsurance contracts.

See 6.4 Legal requirements and Distinguishing Features of an Insurance Contract, above.

See 6.4 Legal requirements and Distinguishing Features of an Insurance Contract, above.

It is rare for Korean companies to purchase industry loss warranty contracts and insurance linked securities. Insurance linked securities would be viewed as securities rather than insurance in Korea. However, it is not clear how industry loss warranty would be characterised by the Korean regulators.

No information is available.

Insurance contracts are interpreted in the same way other contracts are interpreted. Furthermore, an insurance contract is executed through the general terms and conditions that are regulated and interpreted under the Standardised Contracts Regulation Act (SCRA). Under the SCRA, an insurer must comply with, among others, the following rules:

  • The standard terms and conditions should be interpreted in good faith and the insurer should apply the same interpretation to all policyholders;
  • any uncertain terms should be interpreted in favour of the policyholders; and
  • any clauses that place the policyholder at a disadvantage or impose burden on the policyholder should be strictly interpreted.

When an insurance contract is construed, extraneous evidence is permitted. For example, evidence about the negotiations, the circumstances in which the contract was placed or the “usual practice” or understanding in relation to such contracts or particular terms in them are considered to discover the actual agreement between parties.

Warranties or conditions precedent are not necessarily expressly described as warranties or conditions precedent, respectively, in the insurance contract so long as their meaning is clearly stated in the agreement. In case that a breach of warranty by either party occurs, the other party may terminate the contract. In case of breach of a condition precedent, the non-breaching party is not required to perform the obligation under the contract.

See 8.2 Warranties, above.

In the event of a dispute between an insurance company and a policyholder, the parties can use the FSS dispute-resolution process and court procedure. In disputes relating to insurance contracts, the court with jurisdiction over the policyholder’s place of residence has jurisdiction over the dispute. However, the insurance company and a policyholder can agree on a different venue. Disputes concerning reinsurance agreements are usually resolved in courts, except where there are arbitration clauses.

As stated above, consumer insurance contracts are executed through the standard terms and conditions and SCRA protects consumers in terms of interpretation in favour of consumers. For reinsurance agreements, the courts interpret the reinsurance agreement on the assumption that there is balance of bargaining power between parties.

The parties to insurance and reinsurance contracts are free to agree on the forum, venue and applicable law clauses, and there are no special restrictions or limitations on these provisions. However, arbitration clauses in insurance agreements that are signed between insurers and general customers are subject to the restrictions provided by the SCRA. In addition, clauses regarding forum, venue and applicable law that are unreasonably unfavourable to customers are deemed null and void (Article 6, SCRA). According to the Guideline on Review of Standardised Contracts released by the Korean Fair Trade Commission, any clause requiring the policyholder to submit to the court with jurisdiction over the insurer or the court designated by the insurer would be viewed as constituting a breach of the SCRA.

Court proceedings can take place at three levels in Korea – District Court, High Court, and Supreme Court. If a decision of the District Court, the court of first instance, is appealed, the High Court conducts the proceedings as a trial de novo. The decision of the High Court can be appealed to the Supreme Court only on questions of law. To deal with complex disputes involving specialised issues more efficiently, some courts have assigned certain panels of judges to deal with specific types of disputes, including cases involving international transactions, securities, construction, human resources and the environment.

Foreign judgments are recognised and enforced in Korea through application to the Korean courts, which recognise and enforce the foreign

judgment if the following conditions are met:

  • The foreign judgment (including order, decision, etc) is final and conclusive (referred to as the “final judgment” requirement);
  • The court that rendered the judgment has jurisdiction under the principles of international jurisdiction set forth in Korean law or treaties;
  • The defendant (ie, the Korean party) was properly served with the complaint (or equivalent document) and the summons or any orders in a lawful manner (other than by public notice or similar methods) in advance so as to allow sufficient time for preparation of his or her defence, or the defendant responded to the suit without having been served (referred to as the “proper service” requirement);
  • Based on the contents of the final judgment and its legal proceedings, recognising the foreign judgment does not offend the good morals or public order of Korea (referred to as the “public policy” requirement); and
  • A Korean court judgment would be similarly recognised and enforced by the courts in the country of the origin of foreign judgment (referred to as the “reciprocity” requirement), or alternatively, recognition requirements of both countries are not considerably different from one another and the requirements of the foreign country are not strict in their entirety and are materially similar to requirements in Korea (referred to as the “material similarity” requirement).

Arbitration clauses in insurance agreements and reinsurance agreements are enforceable, since parties are free to agree on the terms of their arrangement, whereas arbitration clauses cannot be used in insurance contracts that are based on standard terms and conditions. However, certain corporate insurance contracts that use English-language terms and conditions instead of the standard terms and conditions can include enforceable arbitration clauses.

Choice of forum, venue and applicable law clauses are generally recognised and enforceable. Korea is a member of the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention). As such, if overseas arbitration is selected in an agreement as the forum of choice and venue, this will be recognised and enforceable as follows: (i) If the venue of the arbitration is a fellow member of the New York Convention and the arbitration ruling will be enforced in Korea in accordance with the New York Convention; and (ii) if the venue of the arbitration is not a member country of the New York Convention, the arbitration ruling will be enforced in Korea in accordance with the Civil Procedure Act of Korea.

Under Korean litigation procedures, various mechanisms exist to settle a case with the court’s participation. These options may first be broadly classified between cases where the parties can reach an agreement without the court’s direct input, and those cases where the court must take a more active role.

The parties may agree to a private settlement agreement and a withdrawal of all related actions (ie, without the court becoming involved). However, the parties may also choose to formalise their agreement before the court by presenting the settlement terms at a hearing, which results in a “judicial compromise” (which has the same legal effect as a final and conclusive judgment).

In cases where it is deemed necessary to have the court actively involved to reach settlement, a party may request that the court designate a mediation hearing date. If the court agrees to hold such a hearing (multiple hearings being also possible), the same court panel generally participates as the mediator to hear the parties’ positions and work towards mutually acceptable settlement terms.

If the mediation hearing or hearings are successful, a “mediation statement” is prepared by the court, which has the same legal effect as a “judicial compromise.” If the mediation hearings are not successful, the court can itself decide to issue a “decision in lieu of mediation” based on what it considers to be the best available compromise (this is not mandatory, however). The court may also choose to draft the settlement terms (again, based on what it considers to be the best available compromise) and issue a “decision recommending settlement” without taking any other step (eg, holding a mediation hearing).

Korean insurers are required to pay default interest to policyholders until the actual payment date in case of late payment of claims, but there is no payment of punitive damages. 

Korea is still in the early stages of InsurTech because regulations, such as medical laws and personal information protection laws, operate as constraints to its adoption. Some insurance companies are trying to introduce InsurTech, including auto insurance based on mileage (ie usage-based insurance); big data-based prediction of policy persistency rate, better customer management, management of insurance solicitors, underwriting and claim handling; automatic insurance counselling services using chatbots; travel insurance subscription and insurance claim service available through smart devices (including mobile devices); blockchain-based personal verification services; and insurance subscription and contract inquiry services available through fingerprint authentication. There have also been attempts to offer insurance premium discounts through the use of wearables and medical expense insurance claim services using blockchain.

In December 2017, the FSC and the FSS established guidelines on the development and sale of “health enhancement” insurance products that combined “insurance” and “health care” (eg, providing health care services and reducing insurance premiums if an insured’s health is enhanced through a health care programme).  Such insurance products are new and innovative products that did not exist in the past.

On 16 July 2018, the FSC announced its “Plan for Expansion of Cloud Usage in the Financial Sector” (“Plan”) entailing (i) expansion of the scope of cloud usage in the finance sector, (ii) introduction of standards for cloud services, and (iii) reinforcement of monitoring and investigation on the use of cloud services.

Until now, financial institutions have not been able to use cloud services for their information processing systems as the Regulation on Supervision of Electronic Financial Transactions (EFTR) only allowed the use of the cloud for “non-significant information processing systems” that do not process personal credit information and/or unique identification information. Accordingly, the use of cloud services was effectively barred if personal credit information or unique identification information (“Critical Information”) needed to be processed. Such restriction has been preventing fintech/InsurTech companies and others from providing innovative financial products and services that may have been otherwise possible through new technologies such as AI and Big Data. Against this backdrop, pursuant to the Plan, the FSC recently announced the amendment to the EFTR, effective from 1 January 2019, which introduces the following major changes; (i) scope of use of cloud services by financial companies would be broadened to allow processing of the Critical Information, (ii) financial companies would be required to assess the soundness and security of the cloud service providers and report the assessment result to the FSS, (iii) the cloud service agreement between the cloud service providers and the financial companies would be required to specify certain information including physical location where the cloud service is provided and obligation to allow investigations and access by supervisory authorities and (iv) the cloud systems involved in processing of the Critical Information must be located within Korea.

From 16 May 2018 to 15 June 2018 the FSC accepted applications for designated agents. The designated agent system will allow financial companies to delegate certain core businesses to a third party agent (ie, a fintech company) designated by the FSC as designated agent for the purpose of delivering innovative services to the financial market. Only banks, insurance companies, specialised credit financing companies and credit unions are eligible to delegate certain qualifying businesses to a designated agent.

The new system is part of the Financial Regulation Testbed Programme that was announced by the FSC on 14 November 2017. Those business functions that can be delegated to a designated agent include deposit taking, loan review and insurance underwriting due for review.

In order to be designated as a designated agent, the applicant must complete an application form provided by the FSC and pass the review of the Designated Agent Review Committee. The committee will review relevant qualifications, such as the applicant’s place of business, the innovativeness of its services, benefits to customers, service readiness, and so on. The review process is expected to take about two months. Upon designation, the designated agent and the financial company must execute a business delegation agreement under which the scope of delegation must be limited to those functions that are considered necessary to conduct tests for innovative services for a delegation period of up to two years. 

Korea is facing emerging cyber risks in the wake of increasing cyber-attacks, with compliance risks also looming large in respect to personal information protection. In addition, longevity risk caused by Korea’s rapidly aging population is increasing and liability risks are expected to increase as environmental liability insurance has recently become a compulsory insurance. Insurance products, therefore, are being developed to cover such risks. In addition, natural disaster risks due to climate change and other natural environmental changes are emerging, which is expected to lead to the development of corresponding insurance products.

The following are some examples of new life insurance products that have been developed for the Korean market: 

  • Whole life insurance and insurance for persons with disease, linked with stronger CI coverage and healthcare services (transportation service to the hospital, mobile-device-based health improvement programme, nationwide hospital information and reservation service, self-diagnosis and prevention programme, etc);
  • Whole life annuity insurance adopting the concept of survivor’s annuity;
  • Hybrid type of annuity insurance combining variable annuity insurance with floating rate annuity insurance rider;
  • Variable savings-type insurance from which a contract signing fee is not deducted for policyholders who have continuously maintained their insurance;
  • Variable insurance using a professional asset management solution and ETF model portfolio;
  • CI insurance that expands coverage for minor illnesses and provides benefit payments differentiated for each stage of illness;
  • Specific oriental medical procedure (acupuncture, moxibustion and cupping) treatment expenses rider;
  • Tailored health insurance that converts an insurance contract covering death into health insurance; and 
  • Variable annuity insurance denominated in foreign currency (US dollars).

In the case of non-life insurance companies, the following are some examples of new products that have been developed for the Korean market: 

  • UBI auto insurance;
  • Special terms and conditions that offer focused coverage starting from a certain point until the age of 100 years without terminating the existing contract;
  • Special terms and conditions for a person with a disease providing insurance benefits for a second cancer in case it occurs after two years from the occurrence of the first cancer;
  • Health insurance that covers different levels of surgery costs and supports nursing costs depending on the difficulty of the surgery and the seriousness of the external injury;
  • Insurance that covers damage from cyber defamation and damage from internet direct transaction fraud as special terms and conditions;
  • Children’s comprehensive insurance that provides fever management services using IoT (Internet of Things), artificial intelligence and big data (when children’s body temperatures rise above normal, the service helps a user respond in accordance with guidelines, instead of going directly to the emergency room); and
  • Cancer treatment insurance that provides treatment expenses on a yearly basis after being diagnosed with cancer.

From 2022, IFRS17, a new set of mark-to-market accounting standards for insurance liabilities, will be introduced and implemented. IFRS17 will have a huge impact on certain life insurance companies in Korea that hold legacy high interest guarantee products. The FSS is strengthening the liability adequacy test standards in preparation for the introduction of IFRS17.  For example, the discount rate will be lowered from its current 3.5% to 4% (asset management return) to 2.5% (risk-free rate + liquidity premium) by 2019.

The financial regulatory body is going ahead with establishing a new solvency system, a new asset quality regulatory framework on a mark-to-market accounting basis for insurance companies. The new solvency system will establish stronger standards that meet international standards and sufficiently reflect the insurance environment in Korea, with reference to the International Association of Insurance Supervisors (IAIS), International Capital Standard (ICS) and EU Solvency II. Among other things, it will take into account lapse rates and longevity risks in calculating insurance risks, extend duration of insurance liabilities (maximum of 20 years currently), and mark-to-market assets and liabilities.

The financial regulatory body is establishing draft regulatory standards for the new solvency system, conducting an impact assessment on all insurance companies for one year, establishing the final regulatory standards for the new solvency system, and revising the applicable laws and regulations to reflect such standards by 2019.

Financial sector reform will be the top priority of the FSC. The FSC has said that it will focus on rectifying unreasonable practices in the financial industry, establishing a fair financial market. To this end, the following measures will be taken:

  • Remuneration disclosure regulations for those who receive high performance incentives in financial companies will be strengthened; 
  • The governance structure of financial companies will be improved through the strengthening of outside directors′ roles and the expansion of minority shareholders′ involvement;
  • The sale of unfair financial instruments, including unfair terms and conditions for financial instruments, will be monitored more strictly;
  • Integrated supervision systems for financial group companies will be introduced to monitor and supervise risks associated with the financial group companies; and
  • Institutional investors will be recommended to adopt the Stewardship Code, a model code established by the Corporate Governance Service for institutional investors, which sets forth principles with the aim of promoting the mid- to long-term interests of their clients by pursuing mid- to long-term value enhancement and sustainable growth of the companies in which they invest.

Furthermore, to promote competition, the FSC made an announcement that certain insurance companies, such as online insurers and insurers specialising in medical insurance and long-term care insurance, can be more easily established. For innovative financial services, the FSC has established a ″Fintech Roadmap″ to introduce insurance products for self-driving technology and to distribute blockchain technology more widely. More specifically, the FSC will take measures to secure consumers′ rights to control their personal information and utilise consumer information for big data. In addition, the FSC will continuously activate a test bed for financial regulation, and establish a legal basis to grant provisional approval and exempt from regulation services that pursue more aggressive innovation and provide more benefits to consumers. 

Kim & Chang

39, Sajik-ro 8-gil,
Jongno-gu,
Seoul 03170,
Korea

+82 2 3703 1114

+82 2 737 9091

lawkim@kimchang.com www.kimchang.com
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Kim & Chang Kim & Chan’s market-leading insurance practice provides for a wide range of client needs, including the establishment and licensing of new business entities, general legal advice and assistance on regulatory compliance. It is also well known for its expertise in M&A in the insurance industry and insurance dispute resolution. The insurance practice consists of 30 members – including attorneys, Certified Public Accountants, tax attorneys, actuaries and former regulators – who assist with legal and regulatory compliance, regulatory audits, labour and employment matters, real estate issues, asset management, competition law, tax, litigation, business licence matters and M&A. Major Korean, American, European and Japanese insurance companies regularly seek the firm’s advice regarding their insurance and reinsurance business in South Korea. In addition, Kim & Chang provides structuring and regulatory advice on reinsurance agreements and advises on cross-border sales of offshore insurance products in South Korea by foreign insurers. The firm represents clients in litigation and arbitration proceedings involving insurance claims, subrogation and other insurance-related disputes, and provides tax and HR advisory consulting for insurance businesses.

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