Introduction

The insurance industry in South Korea, as with all other major global insurance markets, remains in the “hard market” cycle which has persisted for several years. While there is speculation that a “soft market” is looming, this may not take full effect in 2025. This is evident with local insurers and global reinsurers in the insurance market who have strengthened and tightened underwriting practices and standards with increasing premiums and reduction in capacity, resulting in a less competitive environment and fewer discounts, benefits or other financial incentives for those who purchase insurance, both for commercial and personal reasons, as it correlates with higher frequency of claims, reduced profits and other external political, economic and social factors – all of which are also currently true in South Korea.

As mentioned above and in this background to 2024, there are a number of trends in relation to contentious matters involving insurers, reinsurers, policyholders and insureds, as well as third-party claimants, that occur in the South Korean insurance market. The following are a number of significant trends and developments that have recently come to the fore in South Korea.

Increase in Property and Casualty Claims

The increase in the number of insurance claims is symptomatic of all insurance markets, and South Korea is no exception. In South Korea, insurers have experienced rising claims across all lines of business with the key metric of the “loss ratio” increasing, based on higher amounts of claims paid with adjustment expenses against premiums earned.

The Financial Supervisory Service (FSS) which acts as the “executive arm” of the Financial Services Commission in South Korea also monitors claims activities for all licensed insurers and has stated that the number of insurance claims has gradually increased in recent years across all insurance product types. The number of life insurance claims, as well as those arising under health and accident insurance policies, has also steadily increased in recent years according to the FSS. The Korea Insurance Development Institute (KIDI) has also compiled data that translates into an annual increase in claims volume of 8% to 10% per annum in key insurance products in South Korea.

Given the rise in insurance claims, insurers have considered and continue to consider the rising claims per line of business, which has led to some insurers reducing capacity, reducing underwriting or withdrawing from certain lines of business as a countermeasure.

Electric Vehicles and Lithium Ion Batteries

The modern-day boom of electric vehicles (EVs), given state-of-the-art technology and increasing consumer and commercial consciousness of the environment and the need to reduce the global carbon footprint of traditional automobiles, has also led to an increased number of fires or thermal events occurring in vehicles. In turn, the insurance industry has responded to numerous claims under property insurance policies, product recall insurance policies, electrical energy storage system insurance policies and others.

EV owners in South Korea have also experienced dangerous thermal events across the country. In particular, approximately 77,000 Hyundai Kona EVs were recalled globally and in South Korea so that the lithium ion battery packs could have battery management system updates and software updates. Hyundai Automobile and LG Chem along with LG Energy Solution investigated these thermal events. In addition, similar “thermal events” have occurred and been reported in the General Motors Bolt make and model. Fires have also been reported in other EVs, such as Tesla’s Model S and Model X electric vehicles, which experienced “thermal runaway” events due to rapid heating within the batteries. Most recently, in August 2024, a Mercedes-Benz EQE sedan which was parked and in idle mode exploded in an underground parking lot in the city of Incheon, leading to a fire that damaged an additional 140 vehicles with 40 of them completely burned as a total loss. The explosion and subsequent fire also caused a power outage for approximately 480 households in neighbouring apartment buildings, and 23 people were hospitalised due to smoke inhalation, including children and firefighters. Mercedes-Benz and the local South Korean authorities are investigating the event, which involved an EV with batteries manufactured in China by Contemporary Amperex Technology Co, Ltd.

The lithium ion battery market in South Korea is comprised of three leading manufacturers – LG Chemical and now LG Energy Solution (a spin-off of LG Chem), Samsung SDI and SK On. In response to these fire events, lithium ion battery manufacturers continue their respective research and development into lithium ion battery cells, electric vehicle battery packs, the operation of EVs, etc. Currently, the cause of the fires (known as thermal events and thermal runaway events) has still to be confirmed, with disputes arising between and among EV owners, EV manufacturers and their insurers and reinsurers.

Fires have also ensued in electrical energy storage facilities in South Korea. In response, the insurance industry has developed and now offers electrical energy storage systems coverage and products (“EESS Insurance”). EESS Insurance provides protection to facilities that store energy for later use, in particular with renewable energy applications, to address the supply and demand for energy. Generally, EESS Insurance is comprised of coverage components for property damage, business interruption, liability insurance and cybersecurity insurance. Similarly, the fire events in electrical energy storage facilities have been investigated, but questions remain as to the cause of the fires occurring at such facilities. The demand for clean energy will continue to grow and the insurance market continues to offer coverage options, while also managing the claims that have been made.

Directors’ and Officers’ Liability

Over the course of the past few years through to 2024, directors’ and officers’ insurance claims have been covered under the financial lines insurance products, which is attributable to a number of factors.

Firstly, there is increased and heightened “shareholder activism”, from ordinary shareholders through to institutional investors, holding corporate leaders and management accountable for decisions made in relation to corporate governance, environmental issues, as well as mergers and acquisitions. A number of factors have contributed to this heightened awareness and aggression on the part of investors. Secondly, the South Korean government has strengthened its regulatory oversight over large conglomerates commonly referred to in Korean as “chaebol” companies, targeting non-compliance with laws and regulations as well as acts of malfeasance in the business practices and decisions made by directors and officers of the company. Thirdly, as in many other countries, investors now demand that the board of a company places key decisions on environment, social and governance (ESG) matters at the company on the agenda of meetings. In doing so, shareholders’ suits also reflect the trend that South Korean companies must implement and at least keep pace with the rest of the world with respect to ESG activities, including management of climate-change risks, non-compliance with environmental laws/regulations, and issues that involve employee labour disputes.

A number of key directors and officers (D&O) claims have materialised and been lodged against insurers. A data centre owned and operated by Kakao suffered from a large fire in 2022 leading to countrywide service outages on multiple Kakao platforms, including KakaoTalk (the messaging app), KakaoPay (the payment services app) and others, which in turn created critical interruptions for many South Koreans.

A D&O claim was lodged against the directors and officers of Kakao alleging negligence in their corporate fiduciary duties by failing to implement and operate proper back-up systems, disaster recovery protocol and mitigation procedures. The underlying claims leading to the D&O claim were the result of damages suffered by users and third parties made against Kakao. In another case, as a consequence of the merger between Korean Air and Asiana Airlines, the directors of Hanjin Group (the parent company of Korean Air) faced controversy, criticism and a host of lawsuits claiming that competition would be reduced due to the merger of the two large commercial and passenger airlines, to the detriment of consumers. Allegations were also made against the directors of Korean Air for poor decision-making and mismanagement, and they attracted a fierce regulatory review by the Korea Fair Trade Commission, as well as strong opposition from international stakeholders. It is believed that their D&O insurance will need to cover legal expenses and liabilities amounting to tens of millions of dollars.

Along with other D&O claims being made by investors and shareholders with subsequent claims being made to D&O insurance carriers, other broader implications may follow. It is inevitable that there will be heightened regulatory scrutiny of corporate governance, especially for those companies engaging in energy, infrastructure, technology and other industries with a broad reach in the public sector, in addition to having a direct impact on the private sector. Moreover, with the increase of D&O claims and the impact and severity of same, regulatory reform and legislation will continue to keep regulatory authorities and lawmakers active in addressing such issues in South Korea.

Warranty and Indemnity Insurance Claims

Insurance brokers and insurers have faced challenges in the sale of warranty and indemnity (W&I) insurance in South Korea due to the lack of deals, the lack of awareness of sellers and buyers on the benefits and protection of W&I insurance coverage, and the local commercial culture of securing indemnities in lieu of insurance to cover breaches of representations and warranties in stock purchase agreements. However, the market has further developed, with many transactions looking to W&I insurance to smooth out deals and to provide post-closing protection to buyers based on such representations and warranties. The leading brokers for W&I insurance have recently reported that there have been more M&A transactions in 2024 as compared to 2023. In addition, a number of claims have been made against insurers for losses under W&I insurance contracts. One emerging trend due to failed acquisitions by South Korean investors, has been a more cautious approach to M&A on a cross-border basis due to risks, such as capital costs, economic uncertainties and geopolitics, while inbound investments by minority interests have noticeably increased.

Coverage Interpretation in Differences in Contract

In South Korea, disputes may arise due to the interpretation of policy wording in reinsurance contracts which, in principle, should be “back-to-back” with the underlying insurance contract. However, certain contributing factors have led to disputes over differences in contract, also known as “DIC”.

One of the unique challenges faced by foreign reinsurers in South Korea is cultural and language issues. Insurance contracts, claims information and documents, as well as claims reports, adjuster’s reports, and investigative reports including government documents are typically prepared in the Korean language with another version of the same document in English or other foreign languages of countries that have a globalised economy such as that of South Korea. Ultimately, DIC and disputes will arise due to policy wording leading to misunderstandings and misinterpretations where terms are “lost in translation”. As a result, a growing number of insurance contracts, reinsurance contracts, reinsurance slips, etc, are prepared in English to avoid disputes regarding the original intent of the parties.

The main guidance in interpreting insurance contracts is provided in the Insurance Business Act and the Civil Act which are also supported and confirmed by judicial decisions in South Korea. The principles of contract law apply to insurance contracts. The laws stipulate that the parties to a contract, including insurance contracts, must act in good faith and deal fairly with one another, and judges will seek to apply the literal and/or plain meaning interpretive principles based on the express language of an insurance contract. Moreover, the courts will seek to broaden coverage in favour of the policyholder or insured on the basis that the insurance was procured and purchased for the benefit of insurance coverage, without unfair and undue disadvantages being imposed by insurers. The foregoing rules continue to be cited and followed by the courts in South Korea in 2024.

Reinsurance Claims and Disputes

Jurisprudence in South Korea recognises the principles of “follow the fortunes” or “follow the settlement” in which a reinsurer is liable to the ceding insurer for reinsurance proceeds as long as the underlying insurance claim was paid within the “four corners” of the insurance contract. Nevertheless, challenges to the foregoing may be made by the reinsurer and upheld by a court or an arbitration panel if the insurance proceeds were paid outside of the insurance contract, for bad faith, fraud, where an ex gratia payment was made or where there are violations or breaches pursuant to the reinsurance arrangement and other special facts or circumstances. There is a history of cases in South Korea where the courts have ruled in favour of the insurer based on the foregoing rules and principles, which are consistently applied in insurer and reinsurer disputes.

Presently, there are a number of such disputes which challenge the “follow the fortunes” and “follow the settlement” principles as interpreted and enforced by the South Korean courts, which may or may not lead to a different interpretation and application of same, especially when a large portion of the ultimate financial responsibility is with the reinsurer and not the insurer. For example, there are ongoing differences in opinion in the interpretation of claims co-operation clauses in reinsurance contracts and to what extent and degree “co-operation” is necessitated for compliance with the obligations to perform under the contract.

Notably, it is also evident that arbitration dispute resolution mechanisms have been more prevalent given the rise of insurer-reinsurer disputes with international arbitration institutions. This is likely the result of foreign counterparties such as reinsurers seeking an allegedly more neutral venue, having a panel of insurance and industry experts, avoiding voluminous and arduous translation work should the language of the dispute resolution be fixed (eg, English), seeking a speedier resolution as opposed to a long drawn-out trial in the courts, as well as cost savings, since all evidence must be submitted in Korean in the South Korean courts.