The regulation of the insurance business is governed by the Insurance Business Act (IBA). The regulatory framework is based on the IBA and its subordinate Regulations, Decrees, guidelines, etc. It provides the legal framework for licensing; product development, including rates and forms; marketing and solicitation; claims handling; business delegation; data protection and information technology outsourcing; finance and accounting; audits and inspections; conduct of non-insurance businesses; insolvency; as well as express provisions for regulatory sanctions, fines and penalties for violations of, and non-compliance with, the IBA.
The insurance industry is also governed by the Korean Commercial Code (KCC) providing for minimum standards, rules and requirements for insurance contracts. Key provisions of the KCC relate to formation; legality; renewals, cancellations and voidance, including the manner in which terms and conditions may be amended. The Corporate Governance of Financial Institutions Act (Corporate Governance Act) sets out a comprehensive set of uniform rules for financial institutions in Korea which define the rules on qualifications of officers and directors, the number and ratio of directors that are “inside directors” and “outside directors” based on asset amount, the implementation of an audit committee, and regular qualification reviews of the shareholders of an insurer and reinsurer.
The insurance industry is regulated on a two-tier basis by the Financial Services Commission and the Financial Supervisory Service. The mission of the regulators, and the policies pursued to that end, are promoting economic growth, sustainability and stability, monitoring and ensuring the financial health and solvency of financial institutions, and acting as the regulatory watch-dog for consumer protection in Korea.
At the executive branch level, the Financial Services Commission (FSC) has statutory authority to oversee the financial services sector of licensed insurers, banks, securities firms, asset management companies and other financial services companies. In doing so, the FSC formulates financial policies; enacts certain Laws and Regulations; and issues licences to financial institutions, with the power to suspend, revoke, and cancel them. The FSC also regulates foreign transactions including cross-border marketing/sales of insurance and reinsurance with the mandate to regulate foreign exchange, anti-money laundering, and counterterrorism through its Korea Financial Intelligence Unit.
The Financial Supervisory Service (FSS) has direct regulatory oversight of the financial services sector. The FSS, as the “executive arm” of the FSC, monitors and addresses the business of insurance; supervises market conduct of insurance market participants including advertising; sales, underwriting, policy rates and forms; and claims procedures. The FSS will also carry out examinations and periodic and special audits as it deems necessary; however, there is a movement to increase self-regulation. The FSS also accepts and handles insurance disputes as well as complaints lodged against insurers made by consumers and also provides an alternative dispute resolution venue for aggrieved consumers.
The Korea Fair Trade Commission (KFTC) promotes the interests of consumers in the sale of insurance and monitors and addresses anti-competitive effects in the insurance industry such as market dominance, discriminatory insurance rates and premiums, price-fixing, and unfair agreements.
The National Tax Service (NTS) is responsible for the taxation of insurers, reinsurers, brokers, agents, intermediaries, etc in accordance with the Corporate Income Tax Law and its subordinate Regulations, Decrees and guidelines.
A person intending to conduct the business of insurance or reinsurance in Korea must secure an Insurance Business Licence issued by the FSC. The minimal capital investment for an insurer or reinsurer as a branch or subsidiary is KRW3 billion or KRW30 billion, respectively. An applicant must satisfy the basic requirements for an Insurance Business Licence by:
The licensing process is two-step, beginning with a Preliminary Licence step where the applicant must demonstrate that it has satisfied all of the qualifications and requirements for an Insurance Business Licence. The second step involves a Final Licence where the applicant demonstrates that it has the personnel, facilities, information technology systems, etc to commence the business of insurance.
Based on the application, the FSC will issue an Insurance Business Licence for any of the following types of insurance business:
Foreign or non-licensed insurers may engage in solicitation and conclude contracts on a cross-border basis subject to various restrictions which are strictly enforced against both local residents and the offshore insurer. See 3 Overseas Firms Doing Business in this Jurisdiction.
The sale of insurance products and services is not subject to premium taxes to the customer/policyholder in Korea and there are no similar premium tax provisions, as there are in other jurisdictions.
In lieu of any taxes on the purchase of insurance, taxes similar to premium taxes are imposed on insurers that conduct the business of insurance in Korea as a branch or subsidiary, including those on an offshore basis having a “permanent establishment” in accordance with Korean tax laws. An “education tax” is collected from insurers at a rate of 0.5% of total gross written premiums, less policy reserves and credit for reinsurance. In addition, insurers pay a guaranty fund surcharge of 0.015% of gross net written premiums for the protection of policyholders and claimants. The liability for education taxes and the guaranty fund surcharge accrues at the inception of the insurance coverage.
There is no education tax or guaranty fund surcharge on premiums for foreign non-admitted insurers and reinsurers; however, it is noted that all life insurers, non-life insurers as well as a reinsurers must comply with Korean International Financial Reporting Standards (K-IFRS).
Corporate income taxes (CIT) for licensed insurers in Korea are calculated from the basis of the K-IFRS financial statements as prepared by insurers. The accounts provision of insurance premiums is generally fully allowed for CIT purposes and subject to CIT application by the NTS.
The FSC and the FSS do regulate non-admitted insurers and reinsurers engaging in the business of insurance on an offshore basis. Pursuant to the Enforcement Decree to the IBA and the proviso set out in Article 3 of the IBA, there are several situations where a person, whether a corporate entity or a natural person (ie, a South Korean resident), may conclude an insurance contract with a foreign insurer (eg, a non-admitted, unauthorised or unlicensed insurer).
A person that is a Korean resident may conclude an insurance contract with a non-admitted foreign insurer for the following life insurance, import/export cargo insurance, aviation insurance, travel insurance, hull insurance, long-term accident insurance, or reinsurance. The foregoing may only be marketed and sold through means of mail, 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 of the IBA. However, non-admitted foreign reinsurers may conduct marketing and sales with a registered reinsurance broker and in no event shall the cession exceed 90% of the entire underlying risk for non-life insurance contracts and risks.
In addition to the above, a Korean resident may also conclude an insurance contract if:
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 punished with a fine of up to KRW50 million and imprisonment of up to five years.
In advance of any exit of the UK from the EU (BREXIT), the National Assembly of Korea ratified a trade deal with the UK on 28 October 2019. The new trade deal between the two countries generally mirrors the terms and commitments of the existing Korea-EU Free Trade Agreement; and for this reason, there will be no significant impact to any trade provisions as a result of BREXIT for the insurance industry.
The practice of arranging insurance through a “fronter” that is admitted in Korea is generally unregulated and without restrictions under the IBA.
It should be noted that, pursuant to the Insurance Supervisory Business Regulation as of 1 January 2019, non-life insurers licensed by the FSC are required to retain a minimum of 10% of the non-life insurance risk for a particular insurance contract when ceding to a reinsurer (the 10% Retention Rule). The foregoing 10% Retention Rule does not apply to automobile insurance and cessions involving (i) a determination by the risk-management committee of an insurer that the rule will not apply or (ii) retrocessions.
Following considerable M&A activity in the last few years in Korea, the number of transactions has been lower since 2018 but has shown signs of increased activity in 2019 due to compliance with regulatory requirements, the necessity for capital injections in-line with new insurer accounting standards and on-going consolidation in a “soft” market.
The Lotte Group concluded its sale of a 53% stockholding in its non-life insurer, Lotte Insurance Co Ltd, to a Korean private equity fund, JKL Partners, for KRW370 billion (approximately USD 317 million). This was due to its move towards a company-wide holding company structure. Pursuant to Korean law, commercial holding companies such as chaebols (family-owned conglomerates) are not permitted to have majority ownership in a subsidiary that is a financial institution as a result of recent government efforts to eliminate undue influence and exploitation of banks, insurers, securities firms and asset management companies. The risk-based capital ratio (RBC Ratio) has since improved to nearly 200% securing sufficient capital to comply with the implementation of the International Financial Reporting Standards 17 and the local Korea-Insurance Capital Standards regimes (IFRS17 and K-ICS) – which will be implemented in 2022. The sale was also made in conjunction with Lotte Group’s sale of 80% of its shareholding in Lotte Card Co Ltd. to Woori Bank and MBK Partners.
The mega-merger of Marsh & McLennan Companies with the Jardine Lloyds Thomson Group resulted in Marsh Korea Inc (Marsh Korea) acquiring Jardine Lloyd Thomson Korea Co Ltd. (JLT Korea) but prior to the transaction, the aviation book of JLT Korea was spun-off and purchased by Arthur J. Gallagher. As a result of the Marsh Korea-JLT Korea merger, the gap in market share in the insurance broking business with its competitors in Korea has widened but there is ongoing speculation that other leading insurance broking firms will explore options to keep pace with Marsh Korea with further consolidation, both globally and in Korea.
It is also noteworthy that the largest reinsurer in Korea, Korean Re established a new branch in Zurich Switzerland, part of the ongoing global expansion and diversification of its global business. Coming in the midst of Brexit, this move is seen as a strategic decision to maintain the existing Lloyd’s of London business with the Swiss-based counterpart in Europe.
In Korea, insurance intermediaries who are registered with the FSS may engage in solicitation activities in Korea. The term solicitation refers to any activity that leads to the conclusion of an insurance contract and is broadly interpreted by the regulatory authorities and the courts in Korea.
The three categories of insurance intermediaries recognised by the FSC are set out below.
An insurance broker engages in the brokering of insurance contracts and acts independently without any fiduciary obligation to policyholders/insureds, insurers or reinsurers; and can solicit, based on its broker registration, life, non-life or accident/health risks.
Individual brokers must complete mandatory training and have a minimum of two years as specified in Article 89 et seq of the IBA. Brokerage companies must have one-third of their directors, executives and/or employees having individual broker registrations with the FSS. There are other prescribed qualifications and disqualifications which are also set out in Article 89 et seq of the IBA and the Presidential Decree which must be observed by insurance brokers.
Insurance brokers must deposit and maintain security for the protection of their clients in the amount of KRW100 million (individual brokers) or KRW300 million (company brokers). This security may be procured as a performance bond or other security interest accepted by the FSS.
Insurance agents or insurance agencies
An insurance agent may be an individual, company or association that engages in the solicitation of insurance on behalf of insurers or reinsurers; and may engage in life, non-life or accident/health-type risks pursuant to its registration with the FSS.
Generally, individual insurance agents are also required to complete mandatory training as prescribed by Article 87 et seq of the IBA and shall have experience of at least two years. Company agents must have at least one registered agent in order to engage in solicitation activities; however, those company agents with one hundred or more employees shall ensure that at least 10% of their directors, officers and/or employees have an agent registration with the FSS. Other prescribed qualifications and disqualifications are set out in Article 87 et seq of the IBA and the Presidential Decree which must be observed by insurance agents and insurance agencies.
Insurance agents must deposit and maintain security for the protection of their clients under the same system used for insurance brokers (ie, KRW100 million (individual agents) and KRW300 million (company agents).
An insurance solicitor is either an employee, special employee (as defined in the Labour Standards Act) or an independent contractor of an insurer or an insurance agency who engages in solicitation activities on behalf of its principal (ie, the insurer). Insurance solicitors are also classified and registered as either a life, non-life or accident/health solicitor with the FSS.
Insurance solicitors must also complete mandatory training pursuant to the IBA while having at least one year of experience whether they are employed by an insurer or an insurance agency. Other prescribed qualifications and disqualifications, which must be observed by insurance solicitors, are set out in Article 86 of the IBA and the Presidential Decree.
No security deposits are required of individual insurance solicitors.
Insurance is also marketed and sold through banks acting as an insurance agent or insurance broker. Specifically, licensed banks, mutual savings banks, investment dealers and investment brokers and other institutions prescribed by Presidential Decree to the IBA may engage in bancassurance in Korea. In engaging in bancassurance business, insurance agents and insurance brokers may not pass along any marketing costs/expenses to their customers and shall engage in fair dealings with their customers, provide material terms and conditions, and avoid conflicts of interest in tying products with traditional banking services and products. In addition, they may receive a commission for bancassurance sales in addition to their regular monthly salary.
Bancassurance products are limited to personal lines insurance such as life insurance with savings accrual components including individual pensions, education insurance and endowment policies, credit life insurance, and accident and health insurance (with long-term care). Non-life bancassurance products are similar to those of life bancassurance but also include homeowners' fire insurance. The bancassurance distribution channel is limited to:
In the solicitation of bancassurance, the regulatory authorities permit banks to register only two employees as brokers or agents to engage in bancassurance solicitation.
It should be noted that many large banks engaging in bancassurance (those with at least KRW2 trillion in total assets for the immediately preceding fiscal year) are limited to bancassurance life insurance sales – per insurance product of a particular life insurer or non-life insurer – of, respectively, equal to or less than 25% of the total revenue of all life insurance products per annum or no more than one line of non-life insurance product in excess of 25% of a particular non-life insurer.
In 2019, insurers and their business partners continue to use other distribution channels and platforms in order to diversify products, increase premium revenue and to remain competitive in the Korean insurance market. As Koreans continue to travel around the world for business and pleasure, certain passenger airline companies and travel agents now look to bundle products and services with the purchase of airline tickets and hotel bookings through the internet. The automobile, mobile device and electronics industries also use point-of-sale opportunities to provide either extended warranties and/or other insurance products for future damage to purchased goods. Insurers have also partnered with automobile financing companies to take advantage of point-of-sale situations to add extended warranties and insurance products to purchasers who finance their car.
An insurance contract may be terminated by an insurer if the insured has misrepresented, concealed or not disclosed facts that are material to the procurement of insurance – either with the intent to commit fraud or by gross negligence – which led to the conclusion of an insurance contract in accordance with the KCC. Termination of the insurance contract by the insurer may be exercised within one month from the discovery of the misrepresentation, concealment or non-disclosure of within three years from the date of execution of the subject insurance contract. Notwithstanding this, the insured will have an affirmative defence if the insurer knew or should have reasonably known of the misrepresentation, concealment or non-disclosure in which case the insurance contract shall remain valid and in-force. Moreover, if it is determined that the misrepresentation, concealment or non-disclosure is not materially related to a loss covered under an insurance contract, the insurer may not be able to terminate the insurance contract and will be liable for the insurance proceeds thereunder.
Insurers and intermediaries of insurers have the duty to inform the prospective insured of all material policy terms and conditions in advance of the conclusion of the insurance contract. In the event that the duty to inform is breached by an insurer or intermediary, the FSC may impose an administrative fine against the insurer of up to 50% of the total premium income related to the subject insurance contract at issue or up to KRW20 million against an individual director, officer or employee responsible for the breach of the duty to inform the insured. In any event, the insurer may challenge these administrative fines if it can demonstrate that it had carried out in “good faith” – with the due care and supervision of its directors, officers and employees – the duty of inform and/or procured same from its intermediaries. The FSC may also impose an administrative fine not exceeding KRW10 million against an intermediary itself for a breach of this duty.
As explained in 5 Distribution, there are three types of intermediaries: insurance brokers, insurance agents and insurance solicitors.
Insurance brokers are “independent” and do not have a fiduciary duty to an insured (this is different from other jurisdictions where insurance brokers act on behalf of an insured) or an insurer. Insurance agents acting on behalf of insurers or reinsurers owe a fiduciary duty in representing the commercial interests of the insurer or reinsurer. Insurance solicitors, as individuals who are employees, special employees or independent contractors, act solely on behalf of their employer, either the insurer or a company agent.
As part of the solicitation process and for the protection of consumers and insureds, intermediaries may not (i) make false statements, (ii) make errors or omissions, and (iii) must give objective criteria and bases for the insurance product. Moreover, intermediaries are required to provide a comparative analysis of other insurance products and their premiums, benefits, coverage, exclusions, etc.
The prima facie elements of an “insurance product” are (i) payment of insurance proceeds and/or other coverage benefits, (ii) pursuant to the occurrence of an accident, and (iii) the exchange of consideration (ie, insurance premiums).
The term “insurable interest” has been defined as “any lawful and substantial economic interest in the safety or preservation of the insured subject from loss, destruction or pecuniary damage.” Generally, it is presumed that an “insurable interest” in favour of the insured exists when the insurance contract is concluded; otherwise, the insurance contract would be void ab initio.
Also, the requirements under the Korean Commercial Code (KCC) and the Standardised Contracts Regulation Act (SCRA) shall be observed by the insurer for insurance forms. At a minimum, pursuant to the IBA, an insurance contract shall include the following provisions: insurance coverage; exclusions/exemptions; term/period; triggers for insurance liability; termination grounds and procedures; consequences of a breach or non-performance of duties, warranties, conditions, etc; rights and payment of policy dividends/ earnings; interest rates and any adjustments/variations including asset management procedures/standards; depositor protections; and other materials terms.
No separate rules apply to multiple insureds or beneficiaries. See 6.4 Legal Requirements and Distinguishing Features of an Insurance Contract.
The rules set out in 6.4 Legal Requirements and Distinguishing Features of an Insurance Contract also apply to personal lines/consumer contracts and reinsurance contracts.
Alternative Risk Transfer (ART) transactions such as loss warranty contracts, insurance-linked securities and catastrophe bonds have been a topic of discussion in Korea. In 2014, the FSC announced that it would review and consider new Regulations to allow for insurers and reinsurers to enter into ART transactions in Korea. At the present time, no guidelines, framework or Regulations have been put forth by the FSC; however, given the implementation of IFRS17 and K-ICS in Korea, the FSC is reviewing ART transactions again as a potential solution to the capital relief problems of insurers in the wake of the new accounting rules and standards to be complied with by 2022. In addition, with certain emerging risks involving climate change, hurricanes, tsunamis, etc, insurers and reinsurers may have a commercial interest to address catastrophic and natural disaster risks through ART.
ART transactions are not recognised as reinsurance in Korea nor is there credit allowed to insurers. See also 7.1 ART Transactions.
However, it is noteworthy that non-insurers such as pensions and high net worth individuals have been involved in ART transactions such as insurance–linked securities and cat bonds outside of Korea.
Korea, as a civil law jurisdiction, relies on the applicable statutes when interpreting insurance contracts such as the IBA and the KCC. However, general contract principles shall apply to an insurance contract as with any other contract in the event of a contractual dispute. Insurance contracts are also governed by the Regulation of Standardised Terms and Conditions Act (RSTCA)
The Standardised Contracts Regulation Act (SCRA) provides minimum insurance contract requirements and standardised wording while preventing the application of unfair terms and conditions of contracts which are disadvantageous to consumers in the contract negotiation process. In this regard, the SCRA seeks to protect insurance policyholders when entering into insurance contracts with insurers. The SCRA, at a minimum, along with other provisions requires that:
Extraneous information, surrounding circumstances as well as custom and practice shall also be given evidentiary weight in the interpretation of an insurance contract.
Warranties in insurance contracts can be implied or express as statements that ultimately affect the validity of the insurance contract. In the case of implied warranties, there are certain insurance contracts which require an insured to disclosure certain personal information such as when an applicant discloses health conditions when applying for a life insurance policy – and in this case there is no express warranty but an implied warranty of the health information as part of the application of the applicant. In cases where there express warranties, affirmative statements are procured by the insurer from the insured stating that certain facts, circumstances and even contingencies exist or will be fulfilled such as in the case of a cybersecurity policy where an insured applicant warrants that it has the necessary safeguards for its information technology systems for the avoidance of data security breaches, leakages, etc. In the event that a warranty under the insurance contract is breached, then the insurance contract may be terminated by the insurer.
A condition precedent is the occurrence of a future event triggering performance under the insurance contract. For example, a commercial property insurance contract may require certain combustible materials to be moved to, or placed, or stored in, a certain area (along with other parameters) by the insured. In the event of a breach of a condition precedent, the insurer is generally not obliged to perform its obligations under the insurance contract.
Disputes between an insurer and a policyholder may be resolved via the FSS dispute-resolution process, which is generally for consumer-related claims, and Korean court proceedings, which address commercial claims disputes. The Korean court that has competence in the jurisdiction in which the principal office or business of the insurer is organised will have jurisdiction over disputes that arises from that insurer's policies. However, the venue may change if an insurer and a policyholder agree to a different one.
With regard to reinsurance contracts, they are usually resolved in court unless they have an arbitration clause which provides that disputes will be resolved by arbitration.
Consumer insurance contracts are executed with the standard terms and conditions and pursuant to the SCRA, which provides minimum requirements and policy wording for the prevention of unfair terms and conditions in contracts which are disadvantageous to policyholders/insureds. In contrast, the courts interpret the reinsurance contract on the assumption that there is balance of bargaining power between a reinsured and a retrocessionaire.
There are no special restrictions or limitations on the choice of forum, venue and applicable-law clauses when parties enter into insurance and reinsurance contracts. However, arbitration clauses present in insurance contracts for personal lines insurance may be reviewed for compliance under the SCRA for unfairness and unreasonableness of jurisdiction and governing law provisions – in which case they may be void ab initio pursuant to Article 6 of the SCRA. Moreover, jurisdiction clauses will be presumptively reviewed by the KFTC if an insured is required to submit to the jurisdiction in which the insurer is domiciled or as unilaterally selected by the insurer.
There are three levels of judicial decision-making in Korea, the District Courts, High Courts, and the Supreme Court.
The non-prevailing party may appeal a decision of the District Court to a High Court to challenge the facts and/or law. This appeal must be made within 14 days from the date of service of the judgment. Judgments are final and binding if there is no appeal. The High Court may re-examine evidence and legal arguments de novo.
Following an adverse judgment by a High Court, a final appeal may be made to the Supreme Court. The Supreme Court will review cases only on questions of law and will not revisit any evidentiary matters of fact.
The Korean courts will recognise and enforce foreign judgments subject to the following conditions being satisfied:
As with the freedom to contract, arbitration clauses are enforceable agreements.
Korea is a member state to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 also known as the “New York Convention.” In this regard, even if an arbitration clause expressly provides for a seat or venue of arbitration in a foreign jurisdiction, the arbitration award will be enforceable and recognised by the courts of Korea if the foreign jurisdiction is also a member state to the New York Convention. If the foreign jurisdiction is not a signatory of the New York Convention, the arbitration award will be subject to and enforced pursuant to the Civil Procedure Act of Korea.
Pursuant to Korean civil procedures, there are alternative dispute resolution procedures to arrive at a settlement or resolution. The court does not have a right or power to compel the litigating parties to mediate disputes or engage with other forms of alternative dispute resolution which include reconciliation. However, the court may recommend that the parties mediate or settle the disputes. The court may decide which out of the two would be appropriate.
A consumer of financial products and services, including those who have purchased insurance, may submit a claim for mediation to the FSS to resolve a dispute. The Disputes Mediation Committee at the FSS (DMC) will have 60 days to review the submission of a claim and make a decision. In the event that both parties to the mediation accept the decision made by the DMC, the dispute is then deemed to have been settled and the decision reached through mediation shall have the same effect as mediation. This settlement shall be final and the parties will not be permitted to raise the dispute again through another dispute resolution venue, including litigation. In the event that either or neither of the parties accepts the decision of the DMC within two weeks from the date on which the mediation decision was served, the mediation shall be confirmed as unsuccessful and parties may then proceed to resolve the dispute in another forum such as the Korean courts.
There are two types of reconciliation: (i) a reconciliation whereby parties to the litigation voluntarily reach a mutual agreement during the litigation and (ii) a reconciliation whereby the judges decides on the subject matter of the agreement and recommends that the parties accept that decision. Reconciliation is successful if the parties reach a mutual agreement and that agreement will have the same effect as a final and conclusive court judgment. If the parties are unable to reach a mutual agreement during the litigation period, the court may render a reconciliation decision which may be appropriate for both parties and this will become void if either of the parties refuse to accept that decision and raises objections within two weeks from the date on which that reconciliation decision had been served. If the foregoing happens, the parties will have to resolve the dispute by continuing the litigation which was on hold during the reconciliation period.
Late payment interest will accrue on insurance proceeds that have not been paid in accordance with the insurance contract including interest accruing following a court decision or arbitral award. Once a judgment is rendered, interest accrues first at the statutory interest rate of 6% per annum from the date on which a claimant is entitled to make a claim for insurance proceeds until the date on which a written complaint demanding the performance of that monetary obligation was served on the non-prevailing obligor party. From the date following the date on which a written complaint was served to the non-prevailing party (ie, the insurer) until the insurance proceeds are made, interest accrues at the statutory rate of 12% per annum. The 12% rate was effective from 1 June 2019, previously it was 15%.
Punitive damages are not imposed for the late payment of insurance proceeds.
The Korean insurance industry has seen significant developments in the evolution of Insurtech and Fintech, with newly implemented regulatory support pursuant to the announcement of the “Fintech Roadmap” by the FSC. Over the course of the past several years, insurers – in addition to reinsurers – are seeking Insurtech innovation, tools and solutions for their businesses from the use of blockchain technology, artificial intelligence and big data. There is ever-increasing use of mobile/electronic devices to support distribution channels, the provision of insurance services, and to facilitate the underwriting and claims handling by insurers.
2019 highlights for Insurtech include:
The Regulatory Sandbox
A key driver for Insurtech development in the past year has been the establishment of a regulatory sandbox which came into effect on 1 April 2019, pursuant to the Special Act on Financial Innovation Support. The regulatory sandbox involved the temporary suspension of Regulations applicable to the financial services sector to promote innovation and to assist the FSC and FSS to develop the amendments or changes to the insurance regulatory framework made necessary by technological advancements. Applicant companies including start-ups are invited to participate in the sandbox and are selected by the FSC with regulatory exemptions that can continue for up to four years subject to the approval of consumer protection and risk management plans. Once in the regulatory sandbox, there are a wide range of exemptions available to the Laws/Regulations including the need for a licence (ie, approval, permission, registration, report, etc) and matters related to corporate governance, scope of products and/or services, soundness of business, conduct of business activities, and supervision and examination by the regulatory authorities. These may be revoked at the discretion of the FSC if it believes or finds that the interests and/or security of individuals may be compromised.
Small Ticket entered the regulatory sandbox as a reward-points type community platform for pet owners who have taken out pet insurance. Points can be used in exchange for pet health services provided by affiliated companies of an insurer. NH Non-Life Insurance now offers “On/Off Foreign Travel Insurance as a travel insurance product where a customer may “turn on” and “turn off” the insurance coverage as necessary during the term of the insurance policy in line with the customer’s travel itinerary.
Cloud Computing/Cloud Servers
As a follow-up to the Plan for Expansion of Cloud Usage for the Financial Services Sector by the FSC, the Regulation on the Supervision of Electronic Financial Transactions (EFTR) was amended to deregulate the use of cloud servers effective 1 January 2019. Prior to the amendment, cloud servers could be used only for non-significant information processing that did not include personal credit information or unique information – which in effect disallowed the use of cloud servers by financial institutions as part of their businesses. Currently, cloud servers are now permitted to be used with personal credit information and the unique information of individuals subject to the cloud servers being located only in Korea, there being proper vetting and utilisation of cloud server vendors and the relevant service agreements including mandatory provisions as promulgated in the EFTR.
As a result, insurers and reinsurers may utilise cloud servers as part of their everyday business operations including the administration of the business, underwriting process, claims handling, accounting and finance along with other back-office functions.
A number of emerging risks that are common to the rest of the world are now being covered, or are in the R&D stage, while some are unique to Korea. The following is a sampling of such emerging risks.
The advent of self-driving cars or autonomous vehicles has not yet fully happened in Korea but current automobile insurance coverage does not adequately or appropriately provide coverage for these types of vehicles. Automobile insurers are looking to rectify this with endorsements or through the introduction of new products.
Due to recent severe and unpredictable weather events and conditions in Korea, the Korea Meteorological Administration has commissioned the Korea Insurance Development Institute to study weather insurance options with the use of insurance-linked securities which can also help manage risks such as those related to events and agricultural risks.
According to OECD reports, Korea has an old age dependency ratio of 20% (population aged 65+ divided by those aged 15-64) and by 2050 the ratio is projected to increase to 70%. Given this dramatic shift in the age in population, insurers are now reviewing how best to deal with health insurance coverage for this segment of the Korean population.
Business models such as ride sharing or short-term lodging trigger new risks for the corporate and individual operators of such businesses. Insurers are providing special insurance programmes for lodging and automobile fleet insurance.
The utilisation of new technologies with artificial intelligence, robotics and big data means insurers and reinsurers are called on to find insurance and risk solutions for start-ups and large conglomerates involved in the use of new technologies with new actuarial models, premium calculations, liabilities for claims as well as determinations on which person/party is liable when losses occur.
The air quality can be as unpredictable as other weather patterns in Korea and ranges from "good" with an air quality index (AQI) score of 0–50, while on extreme days it can reach “unhealthy”, “very unhealthy” and “hazardous” levels based on the AQI being in excess of 150 and above. Given the potential health hazards from heart disease, respiratory issues and cases of miscarriage, insurers are now faced with developing new products to address “micro-dust” illnesses caused by industrial pollutants from neighbouring countries as well as carbon emissions and particles released locally.
Under “Moon-Care” which is the universal healthcare initiative of President Moon Jae-In, health insurance coverage is altered and, in some cases, diminished. In response, the private insurance market will need to find ways to provide cover for any non-covered medical services and gaps.
Cyber risks are ever-increasing in Korea and as result there have been new policy forms introduced into the market to provide coverage for data breaches, leakages, hackings, etc including such new types of cyber risks with cryptocurrency and other financial-related or “coin”-based tokens using blockchain technology.
Warranty and indemnity insurance covering breaches of representations and warranties made by sellers under an M&A transaction have been in the Korean market for more than a decade now; however, leading insurance brokers are now reporting that W&I policies are being brokered and sold at a greater volume and frequency in 2019.
In line with some of the emerging risks described in 11.1 Emerging Risks, the following are some examples of new insurance products:
Micro-Dust Illness Insurance
This covers illnesses and risks including chronic obstructive pulmonary disease, respiratory cancers (including lung and larynx cancer), acute myocardial infarction, cerebral haemorrhage, heart diseases and brain diseases and other illnesses directly caused by the inhalation and/or absorption of micro-dust.
Hourly Insurance for Part-Time Delivery Drivers.
Part-time workers delivering goods and food items in Korea are challenged to secure insurance for their two-wheeled vehicles which may be operated with a carbon-based fuel, electricity or by manual operation. In response, insurers now provide insurance for part-time delivery drivers for collision, personal injury and third-party liability.
Individual Cyberliability Insurance
This protects individual users from financial losses that result from online shopping and credit/payment fraud; cyberfinancial crimes; and identify theft through phishing, pharming, smishing, etc.
Travel Insurance Policies
The innovation here is that business and leisure travellers may be able to bundle insurance with the purchase of a ticket at the point-of-sale for travel cancellations, emergency medical expenses, accidents and personal injury, personal possessions, travel-documents replacement, electronic devices, etc.
Personal Mobility Insurance
This protects a user of personal mobility devices including bicycles, e-scooters, roller skates, wheelchairs, etc for accidental death and personal injury when operating/using the foregoing and any bodily damage and property damage to a third party caused thereby for the wrongful use, possession and operation of same with legal costs incurred.
Mobile Affinity Programmes
These provide cover for mobile devices for users who waived insurance coverage at the point-of-sale of a mobile device or for mobile devices in the second-hand/used market or for those which were purchased outside of the country.
Alternative solutions in lieu of insurance such as warranties continue to be developed, marketed and sold in Korea such as the following:
Extended Warranty for Auto Quality Assurance
This provides cover for the repair costs for automobiles beyond the manufacturer’s warranty.
Electronics “Plus” Warranties
These are being offered by more-and-more electronics manufacturers to cover losses to electronic equipment, stored data and replacement costs for electronic devices as an additional warranty following the expiration of the original warranty by the manufacturer.
The Korean Insurance Capital Standard (K-ICS) is to be implemented starting on 1 January 2022, this will replace the RBC Ratio requirement 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 and deleterious impact on insurers in Korea.
Earlier in 2019, insurers conducted K-ICS simulations in advance of the implementation of K-ICS (and IFRS17) and according to unofficial reports, on average Korean insurers are now facing a reduction in their RBC Ratio of 150–200% which could put them below the recommended market standard of 150% or the statutory requirement of 100%. In light of the significant reductions in RBC Ratios, life insurers and non-life insurers with long-term care products may face a number of scenarios such as (i) merger or acquisition for additional capital, (ii) transfer of blocks of insurance business, (iii) transactions with insurance-linked securities, (iv) reinsurance including financial reinsurance, and (v) in the most dire of consequences – liquidation and closure.
As 2019 came to a close, the FSS has re-engaged a Task Force to address potential solutions for capital relief including the use of financial reinsurance and assisting insurers in maintain solvency and sustainability. Most, if not all, insurers have updated and implemented information technology systems in accordance with IFRS17 and K-ICS. Several insurers are targets for M&A while Prudential Financial has announced that it will sell its Korea life insurance business. As IFRS17 and K-ICS is a top priority, there will be on-going developments in Korea as insurers and the regulators ramp up to 2022.
The FSC convened a series of meetings as part of the “Advancement Group for Insurance Capital Soundness.” Key agenda items relate to system improvements in preparation for the implementation of IFRS 17 for insurance contracts including ways to improve the liability adequacy test (LAT) and the establishment of financial soundness reserves. The changes to LAT are intended to actively induce insurers to raise capital in preparation for the implementation of IFRS 17.
In particular, the FSC announced that "the liability adequacy test is being conducted to induce debts to be prepared in advance" for the market price evaluation of insurance liabilities under IFRS 17. The IFRS 17 implementation has changed the cost methods, which previously discounted insurance liabilities at historical interest rates, to the current pricing method which discounts at present interest rates. It will be imperative to examine ways in which capital can be raised in advance of IFRS17 implementation if the profit or loss of insurers is sensitive to interest rate fluctuations. The LAT is a set of criteria to determine the amount necessary for an insurer to keep adequate policy reserves in order to pay insurance proceeds/benefits.
LAT is based on the valuation of its future cash flow in terms of present value and a discount rate is used for the conversion. In the event that the discount rate is lowered; conversely, policy reserves must be increased. The FSC plans to review and find solutions to alleviate the financial burden on insurers by lowering the discount rate by 2020.
Currently, there are no significant laws scheduled to be enacted in 2020 relating to the insurance industry, its regulation or its products (ie, the IBA and the Enforcement Decree to the IBA).
However, it was announced on 8 November 2019 that there will be various amendments to the current Regulations on the Supervision of the Insurance Business to expand the definition of a “professional insured”, in which case an insurer’s duty to explain certain matters on the insurance will be deemed to have been performed if made through electronic means and confirmed at a later time. The Korea Insurance Research Institute has also confirmed that the foregoing regulatory changes are being discussed with the regulators.
In addition, the following are also being contemplated by the FSC/FSS:
Amendment to major laws relating to protection of personal information such as the Personal Information Protection Act, Credit Information Act and Act on Promotion of Information and Communications are being carried out to enable the development of financial products (insurance products) through the use of big data. It is expected that the relevant laws will be amended by early next year (ie, 2020) if the amendment process proceeds quickly.
New Compulsory Insurance in 2019
Article 32-3 of the Act on Promotion of Information and Communications Network Utilisation and Information Protection, etc (Information Protection Act) now requires certain providers of information and communications services (ISP) to (i) take out insurance to cover losses incurred by a customer due to the ISP’s breach of its obligations under the Information Protection Act, (ii) join a mutual organisation, (iii) or set aside reserves.
The Elevator Safety Management Act requires owners/operators of elevators and lifts to maintain insurance as a guarantee of compensation for losses that the owner/operator may cause to persons using elevators.
Article 18(3) of the Enforcement Decree to the Tourism Promotion Act now requires any person registered to operate a campground business to (i) purchase and maintain insurance prior to the commencement of that business and take out liability insurance that covers any loss incurred by campground users due to disaster or accidents that occur on the campground facilities, or (ii) join a mutual association.
The Impending Commercialisation of Self-Driving Cars and the Shift in Liability
The commercialisation of self-driving cars is just around the corner. Let us imagine a situation as follows which may take place in the near future.
Where a vehicle (“Vehicle X”) hits and injures a pedestrian (“Victim A”), it may not be possible for Victim A to know whether Vehicle X is a car capable of self-driving and, if so, whether Vehicle X was in auto-driving mode at the time of the accident. If, however, the owner of Vehicle X (“Owner B”), who was sitting at the driver’s seat of the Vehicle X at the time of the accident, claims that he/she is not liable because “the vehicle is a self-driving car and it was auto-driving”, it would be hard for Victim A to accept Owner B’s argument. In a case like this, from who can Victim A seek compensation?
Currently, if a car accident occurs in Korea, the liability for damages falls on the operator of the vehicle (ie, the owner or the holder of right to use the vehicle) in the first instance, who then can exercise the right of recourse against the liable party. Although there are some grounds for exemption of liability under Korean law, the operator is held strictly liable because the operator is rarely exempted from liability in practice.
When self-driving cars become widely available, it may become possible for car manufacturers to be held liable in the first instance because once a self-driving vehicle is purchased, the driving of the vehicle will be under the control not of the owner of the vehicle but of the manufacturer. In other words, taking into account various factors such as the management of liability and the control aspect of the vehicle in an era of autonomous vehicles, the car manufacturers may, arguably, have to assume the primary liability for automobile accidents. In any event, the emergence of self-driving cars will lead to an expansion of the scope of the car manufacturers’ liability.
Regarding self-driving cars in Korea today, on 25 November 2019, a test-drive of an autonomous car carrying passengers took place in the city of Hwaseong, Gyeonggi Province, Korea. The test was successful as the vehicle was driven safely, free of any intervention by a driver.
The Korean government enacted the Act on the Promotion and Support for Commercialisation of Autonomous Vehicles, which will come into effect on 1 May 2020, to boost the creation of the administrative and physical environment to expedite the commercialisation of autonomous vehicles. Under this statute, municipal governments can set up safe zones for testing autonomous vehicles; uncertified Co-operative Intelligent Transport System (C-ITS) can be tested on actual roads; and exceptions to personal data processing are provided. At present, the Korean government aims to make it possible for fully-automated vehicles (ie, Level 4 automation) to operate on all roads nationwide by 2027.
The technology for autonomous driving can be categorised into three areas: perception, localisation, and control. First, a self-driving car can continuously collect information from its surroundings and make sense of the information. The car can also amplify the approximate location of the vehicle, obtained through GPS, using the information obtained through sensors and pinpoint its exact location by comparing the data with a map. Further, the self-driving car can anticipate the movements of the people and objects in the surrounding area and react accordingly based on the pre-defined algorithms.
The overarching advantage of self-driving cars is safety. Accidents caused by drivers who were asleep, intoxicated, or careless at the wheel can be completely prevented. A wide array of sensors and cameras installed in the vehicle will enable 360-degree surveillance and provide for quicker response times to unexpected road situations. KPMG estimates that, if self-driving cars are commercialised by 2040, road accidents can be cut by over 80%. There is also the added benefit of incurring fewer environmental costs by improving the fuel efficiency and minimising the production of carbon dioxide, as well as reducing substantial social costs such as the loss of life and/or medical costs.
Regarding liability for damages in an era of autonomous vehicles, as it stands now, a person who is in control of a vehicle and who benefits from the vehicle (the owner or the holder of right to use the vehicle) is subject to liability in accordance with the Act on Guarantee of Compensation for Loss Caused by Automobile. The driver of the vehicle rarely escapes from liability unless the accident was caused intentionally by the victim and, hence, the driver of the vehicle is subject to strict liability. Whilst this underlying principle will not change any time soon, the following changes are likely to occur in the future.
A Transitional Period will Continue for Unforeseeable Future
The autonomous vehicles which are set to be unveiled in Korea are Level 3 (“conditional automation”) vehicles. At Level 3 autonomy, a vehicle is equipped with the automated driving system, but the driver should stay alert and ready to take over control over the vehicle in case of an emergency. The US Society of Automotive Engineers (SAE) and the National Highway Traffic Safety Administration (NHTSA) classified the level of automation into six levels, from Level 0 to Level 5. Level 4 (“high automation”) vehicles can operate in autonomous mode in normal road environments. Level 5 (“full automation”) vehicles can operate in autonomous mode in all road environments and conditions.
Even if the autonomous vehicles become commercially available, conventional vehicles will not suddenly disappear but rather, for substantial period of time, run side by side with autonomous vehicles. This, in all likelihood, will cause various types of road accidents. The US Governors Highway Safety Association (GHSA) predicts that autonomous vehicles will share the road with human-driven vehicles for at least the next 30 years. At Level 3 autonomy, the driver must remain alert and ready to take control of the vehicle at all times, despite not assuming the duty of being on the lookout and maintaining control of the vehicle in autonomous mode. Level 3 vehicles are only allowed to be operated in autonomous mode when given operating conditions including weather, road conditions, and communication (operational design domains, or ODDs) are satisfied.
If ODDs are not satisfied, the vehicle should be driven, manually, by the driver. In case a vehicle deviates from ODDs while operating in autonomous mode, the driver should instantaneously take control of the vehicle. In the event of an accident involving an autonomous car operating in autonomous mode within the prescribed ODDs (autonomous car accident), liability specific to the accident involving an autonomous car arises. However, if an autonomous car accident occurs while it is operating in manual mode, during the take-over process, or while operating in autonomous mode with ODDs not satisfied, the driver must assume the duty to drive with the same care as in any car accident not involving an autonomous car. In short, in the event of an accident involving a Level 3 vehicle, the entity ultimately responsible for the accident differs depending on whether the vehicle was in autonomous or manual mode, or whether there was a take-over request from the system. Since self-driving cars at different levels and human-driven cars will run on the road together for a substantial length of time in the future, transitional situations may be prolonged.
Expansion of Product Liability
Car manufacturers will increasingly assume product liability in the era of autonomous vehicles. The expansion of product liability resulting from defects in the automated driving system is a logical conclusion because human driving behaviur is replaced by the automated driving system. Whereas they presently assume product liability only when defects of the car are factors in an accident involving a regular car, they will be required to bear product liability for the accident caused not only by defects of the car but also by defects of the automated driving system operated by software in an accident involving an autonomous car. Thus, there will be an increasing number of cases where car makers must assume product liability. As the level of driving automation evolves to Level 4 and Level 5 where the driver is hardly in control of operation of the vehicle, car manufacturers will be under enormous social pressure to become the primary entity liable for compensation for damages resulting from operation of self-driving cars.
The generally prevailing opinion is that software cannot be deemed a product under the Product Liability Act because it does not itself constitute a movable asset. However, if the software of self-driving cars is regarded as embedded software that works as a component of a car, any defect in the software may be deemed a defect of the car. Legislation needs to be amended to avoid controversy over whether self-driving car software constitutes a product.
Importance of Determining the Causes of Accidents
For a Level 3 vehicle, it is important to clearly determine whether the car was operating in autonomous mode at the time of the accident and what caused the accident because accidents may have various causes including driver negligence; defects in the system, vehicle device, or communication; or road conditions. According to the current automobile accident compensation system, the operator of the car is first liable for damages that are covered by the auto insurer, which later claims indemnity against the person responsible for the accident. This system will remain effective for Level 3 autonomous vehicles. For self-driving cars operated in autonomous mode, in the event of an accident, it is highly likely that a car manufacturer, automated driving system maker, road facility manager or network carrier, rather than the driver, will assume final liability. Thus, clearly determining the cause of an accident is critical in order to ensure that such liability is not passed on to drivers in the form of higher insurance premiums.