Contributed By Lee & Ko
Market Trends by Figures
The Korean insurance market is one of the biggest insurance markets in the world. Korea is the seventh largest market by total premium income and fifth by premium to GDP (2017 Swiss Re study). The industry sector is comprised of insurers conducting life insurance business, non-life insurance business and accident and health insurance, with certain other long-term coverages that are known as the “third insurance business” in Korea. Currently, there are 24 life insurers and 31 non-life insurers admitted to conduct the business of insurance in Korea – three of these were issued by the Korean regulatory authorities in 2016, including Allianz Global Corporate & Specialty, Asia Capital Re and Pacific Life Re, representing a departure from the decade-long unofficial regulatory position that no new insurance and reinsurance business licences would be issued by the Financial Services Commission. Foreign insurers as non-admitted insurers also engage in insuring local risks in Korea through the non-admitted market and through “fronting arrangements” and “fly-in and fly-out” cross-border insurance.
The Korean insurance industry experienced negative growth rates in 2017. The total value of insurance premiums (excluding reinsurance premiums) fell by 1% over the year (Korean Insurance Research Institute, 2018 CEO Report). This negative growth has been caused by a 4.9% contraction in the larger life insurance market, despite the general insurance market growing by 4.5% over the same period.
The decline in premium volumes and sales in the life insurance market is attributable to (i) the removal of tax credits previously available on ordinary life insurance policies, and (ii) cutbacks in sales activities by life insurers ahead of the introduction of new insurance solvency standards expected to increase the required capital reserves for insurers with long-term policies.
Growth on the non-life side has mainly been led by the further development of the long-term health and accident insurance market. This growth in Korea is partly attributable to an aging population increasingly requiring various healthcare coverages, and the surge in the sale of new medical indemnity insurance products covering those insureds already diagnosed with illnesses and conditions such as diabetes and leukaemia. All other major areas of non-life insurance – such as marine, guarantee and so on – have also experienced significant growth, except in the case of fire insurance.
Industry dispute with the regulator on maturation of immediate annuity products
Leading life insurers in Korea face ongoing regulatory concerns, media pressure and potential litigation against the Financial Supervisory Services of Korea, regarding a dispute over the interpretation and potential mis-selling practices of “immediate annuity” products in the Korean marketplace.
The dispute over immediate annuities is likely to be the headlining legal case for the life insurance industry in Korea for 2018 and several years to come as the dispute is argued in the Korean courts. The potential claims facing the largest life insurer in Korea are worth approximately USD430 million, and other life insurers face potential claims for significant amounts.
All major life insurers in Korea – local and foreign-owned – have actively marketed “immediate annuity” products in recent years. Under the annuity contract, the insurer initially receives a lump sum from the customer upon commencement of the contract, and in return, the insurer advances periodic payments throughout the term of the annuity contract, as well as the return of the initial lump sum amount at maturity. In the process of marketing, selling and managing the annuities, the insurance companies incur acquisition and management costs. As a result, the life insurers deduct a portion of each annuity payment during the term to set it aside in order to make up the shortfall in the initial lump sum from the acquisition and management costs. The deduction is clearly provided for in the technical notes to the annuities with certain contractual wording pointing to the potential deduction for such costs; however, there are disputes over the effect and clarity of the contractual wording as stated in the annuity contract.
The FSS alleges that holders of the annuity contracts were short-changed in their annuity payments. The dispute involves the validity of the above-mentioned deductions in the returns to be paid to the holders of the annuity contracts. The specific issues are (i) contractual, whether the annuity contract had permitted the insurers to make certain deductions from the returns in light of the management and acquisition costs that the insurer had incurred, and (ii) whether there was mis-selling – that is, whether it was explained by the insurance agents and insurance solicitors of the life insurers that such deductions would be made upon maturity of the annuity contract.
The FSS began its regulatory review and action in late 2017, resulting in a non-binding order to Samsung Life Insurance Co, Ltd that it owed and must pay additional amounts to the holders of its immediate annuity contracts. Recently, the FSS made a further non-binding order to all insurers to pay their respective customers holding annuity contracts for the alleged shortfall. In a rare case of collective impasse against the financial regulator, no life insurer has complied with the orders to date (October 2018).
Recently, Samsung Life submitted a request for resolution to the Seoul Central District Court for confirmation that it does not have any liabilities as demanded by its annuity holders and argued by the FSS. It is thought that other major life insurers are following suit.
Cyber insurance claims for hackings of cryptocurrency exchanges
During 2017 and 2018, Korea was one of the leading jurisdictions for cryptocurrency exchanges and arbitrage, with the country responsible for over one-third of Bitcoin trades last year. Korea does not have any explicitly applicable cryptocurrency regulations, nor has the tax authority defined the status of cryptocurrencies for the purposes of taxation. The lack of regulation has in part fostered the growth of the large volume of trading, with higher prices leading to what is known as the “kimchi premium.”
However, the cryptocurrency exchanges have vulnerabilities in their security systems and have been the target of a number of hackings in Korea including Bithumb and YouBit.
Cryptocurrency exchanges have faced challenges in establishing their right to claims proceeds as they have found it difficult to establish that they have satisfied the conditions precedent to the insurance payment – that proper security measures have been implemented to protect against data breaches, security threats and hackings. In addition, claimants have had issues with confirming the dates of accidents, given the lack of evidence, which is “wiped out” during hackings, resulting in insurance claims being denied. Recently, a cryptocurrency exchange operator submitted an insurance claim under a cybersecurity insurance policy for insurance proceeds for losses it suffered resulting from a hacking, leading to the theft of cryptocurrency, only to have it denied based on the policyholder having failed to implement such security measures and systems.
More importantly, the cybersecurity insurance policies that have been offered do not cover “theft of cryptocurrency” but for loss or leakage of personal and financial information. As cryptocurrencies continue to be traded in Korea and cybersecurity threats remain, ongoing claims disputes may also arise for insurers and their policyholders. In response, other insurers from Lloyd’s of London and Hanwha General Insurance have developed new and customised insurance policies designed to protect against hacking for cryptocurrency exchanges and the financial losses resulting from the theft of cryptocurrencies.
Insurance Financial Reporting Standards 17 and Korean Insurance Capital Standards
Korea is set to adopt new insurance accounting and solvency standards by 2021. The new standards, among other things, will most importantly require insurance companies in Korea to value their liabilities at their market-based values.
Most notably, the new standards are expected to lead to certain insurers not being able to meet the increased levels of required capital under the K-ICS. The application of market-consistent discount rates will be much lower than the discount rates they had traditionally used to evaluate their liabilities.
The increase in the required capital reserves has had and will continue to have major flow-on effects: (i) the increase in the issuance of hybrid securities by insurance companies across the industry to bump up their capital prior to the implementation of the Standards, (ii) potential M&A activity, and/or (iii) disposal of portions of books of business through loss portfolio transfers and other methods to reduce liabilities of the books of insurers to come in the next few years for those insurers who fail to secure or inject enough capital prior to the implementation of the standards.
Insurtech in Korea
InsurTech has yet to “revolutionise” the Korean insurance industry. There has nonetheless been a development of insurance-related services and processes utilising the Internet of Things (IoT), Blockchain, Big Data and Artificial Intelligence (AI) technologies.
At the fore are the IoT products controlling premium rates based on the policyholder’s lifestyle and risk-management practices. Certain insurers track the driving behaviour of the insured through their movement as tracked on their mobile phones, and reward those drivers who satisfy their safe-driving criteria in the form of lower premiums. The feeding of health, lifestyle and exercise data through the insured’s smartwatch, wearable devices or other mobile devices can also work to the same end.
Insurers continue to find ways to utilise Big Data while analysing and developing algorithms to assist in finding more efficient and accurate underwriting and claims handling procedures. In particular, insurers now seek to find ways to improve loss ratios, which are higher due to insurance fraud and improper determination of coverages under insurance contracts (eg health insurance).
The potential deregulation of the current cloud regulations in Korea, which practically prohibit the processing of personal credit information on “public cloud” servers, will facilitate underwriting and claims processes. The proposed amendments to the regulations will have the effect of allowing insurers to utilise SaaS-based underwriting systems and pricing systems hosted on cloud servers, to rely on the capacity of the cloud server and ready-built calculation algorithms and software available online.