INSURANCE
Overview
Korea is ranked as one of the top ten insurance markets in the world in terms of premium income
received. There are no barriers to the establishment or purchase of an existing insurance company
by a foreign investor. The Korean government is to be commended for creating the conditions for
this situation. Likewise, the Korean government is to be commended for its pursuit of improving
solvency standards, resolving the issue of non-viable companies and moving the country’s
insurance industry closer to international norms.
Objectives
Despite these efforts, there remains a considerable gap between the practices found in developed
insurance markets and those in Korea. The Financial Supervisory Service (FSS) must continue in
its efforts to seek further deregulation of the industry.
AMCHAM’s objectives are to protect the interests of the Korean insurance consumer; assist
government-stated objectives to improve the Korean insurance market so that it more closely
reflects international standards, thereby improving the attractiveness of the industry to foreign
investors and reducing the financial strain on public funds and to create a competitive
marketplace in Korea through innovation, professionalism and increased efficiency.
Areas for Improvement
In order to accomplish these objectives, a number of areas should be addressed.
Investment Climate and Financial Performance
The industry continues to suffer from a capital shortfall necessary to meet minimum solvency
standards. The gradual adoption of international standards is putting more pressure on weak
insurance companies and the advent of bancassurance in 2003 placed further stress on those
companies. While bancassurance law has created practical problems, it has exceeded expectations
with regard to the ability to attract both foreign and domestic capital to the industry. It is
imperative that the industry is lifted out of its current dependence on public funds and that the
safety of policyholder obligations is assured. The insurance industry shares common problems in
attracting investment with many other segments of the economy. Resolving the solvency crisis in
the industry will require a re-allocation of priorities. First and foremost is the protection of the
policyholders. Capital infusions or conventional merger and acquisitions (M&A) activity will not
rescue all companies that may become insolvent. Other remedies, such as encouraging healthy
companies to acquire blocks of policyholders without having to assume the burden of acquiring
the company, should be encouraged.
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Another issue is the delay in finalizing the terms for the listing of life insurance companies.
While this does not directly affect AMCHAM member companies today, it does have an indirect
negative impact on the industry as an attractive opportunity for investment. Prudent regulation of
insurance company assets and liabilities require that those assets that are linked to the
accumulation of policyholder benefits be segregated from the general assets of the company.
Current regulations permit this, but to date have only been promulgated with respect to tax-
qualified individual annuity plans and variable products. Separate accounts should be required for
all policyholder funds, including those of participating policies, to avoid concerns on surplus,
reevaluating reserve guidelines, and grouping investment income and gain on capital with the
participating dividend account paid to policyholders. The advent of market-sensitive interest rate
products and the group pension product requires this accounting change.
Nevertheless, under the current regulation, companies are not allowed to make differentiated
treatment between group participating policies and individual participating policies. This could
result in a windfall for individual policyholders when companies are required to pay dividends or
reserve money for individual policyholders using profits from group policies. Also, according to
the local accounting rules, any funding from the head office must be offset against accumulated
losses. Due to this requirement, an insurance company with infused funds from its head office is
prevented from using profits from its group participation policies to offset actual losses because
the financial statements of the company may not show accumulated losses.
Recommendations:
Resolve the issues of transparency and the cost of doing business in line with the required
changes affecting the entire Korean business structure.
Permit companies to acquire policyholders of troubled insurance companies without also
purchasing company infrastructure and employees. This would encourage foreign
investment.
Finalize the listing terms for life insurance companies.
Implement regulations requiring separate accounting for policyholder funds, including
those of participating policies, to promote sound investment practices and returns to
policyholders.
Effect a revision to the regulation to allow differentiated treatment between group
participating policies and individual participating policies in terms of distribution of
profits.
Establish a provision in the accounting rules whereby a company that infuses funds from
its head office does not need to use those funds to offset accumulated losses (i.e., allowing
funds received from the head office to be transferred from retained earnings to the capital
account).
Product Development and Distribution
One of the positive trends over the past several years has been the progress made in deregulating
the insurance industry. The Insurance Business Law furthers this effort. Development of new
types of insurance products is a positive trend benefiting the Korean consumer. There have been
positive developments in announcing the deregulation of the various life insurance product-
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pricing assumptions. The change of the product approval process to use and file was undoubtedly
intended as a move towards allowing life insurance companies greater scope for product
innovation. However, the actual implementation of these liberalizations has been frustrating.
Companies have had product submissions refused until revisions that FSS believed were
necessary were made. What may on the surface appear to be products that conform to
international norms in reality are not. An example of this is variable life in which the Korean
version requires a guaranteed minimum be included, thereby prohibiting an alternative of non-
guarantee option to consumers. Another example would be the requirement that rates for group
term insurance be based on the company’s data in the Korean market. Products approved and
working well in other developed markets are rejected by FSS on grounds of insufficient local
data, the inadmissibility of credible data from other countries and the guise of consumer
protection.
To promote the development of specialized, sophisticated insurance products in keeping pace
with the nature of the rapidly developing Korean economy, FSS should also help ensure that
small, niche players are able to survive and thrive in the Korean market. Current product filing
requirements, however, hinder the potential for small companies to compete with large
companies that already hold a huge market share. Indeed, instead of promoting the concepts of
specialization and differentiation, filing requirements place small entrants at an instant
disadvantage. Specifically, small companies are hobbled by having to add their high expense
ratios to pure loss costs. Small companies’ high expense ratios tend to be several times higher
than most large companies’ due to a lack of economies of scale. This current expense loading
formula prices small company products out of the market and fails to take into account niche and
specialty underwriting strategies.
Some foreign carriers, operating through a small branch office in Korea, have the potential to
bring world-class products to the Korean market. The expertise required to develop these highly
specialized products, however, inevitably results in high operating costs that subsequently are
reflected in high expense loadings. Current expense ratio requirements are not appropriate for this
type of business model.
As small companies attempt to introduce valuable new and sophisticated products into the
Korean insurance market, they should be granted some flexibility in the pricing of their products
in order for them to obtain the critical mass necessary to achieve operational efficiency.
FSS should focus its energies on establishing a regulatory framework that assures the financial
viability of companies and protects the consumer through proper disclosure, rather than by
becoming involved in micromanagement of product design. It is up to the insurance companies
themselves to design and sell products that meet regulatory requirements, while permitting free
market mechanisms to decide which product the consumer prefers. The larger domestic
companies have a distinct advantage due to economies of scale and the close associations within
their group. There is also a social impact in eliminating risk-based pricing, as there is no
incentive for the insurance consumer to employ practices that would reduce the possibility of
losses.
In addition, consumer choice of product and price is enhanced by the opportunity to select a
distribution channel to purchase a product or service. During 2003, progress was made in
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improving distribution channels by the addition of other financial institutions, securities
companies and mutual savings banks as alternative distribution channels under bancassurance
regulation. And yet, uncertainty still remains over regulations and enforcement related to the use
of telemarketing, direct mail and other non-traditional methods of distribution, such as sales
through bank branches. The revised Insurance Business Law and the Enforcement Decree
promulgated there under address some of these issues but those that still remain unresolved
include the prohibition of out-bound sales in bancassurance. Although the risk of possible misuse
of customer information is the apparent rationale behind such a restriction, the risk is not clearly
identified in global markets that allow this function, nor is the risk believed to outweigh a
customer’s right to receive valuable services and choose benefits that are not available due to the
restriction. A related issue is the ability of life insurance agents to sell other financial products
such as mutual funds. Expansion of distribution carries with it an obligation that individuals who
sell insurance and other financial products must be properly trained and licensed.
Recommendations:
Restructure the product approval process department at FSS to align it with the spirit of
the regulations so that Korean consumers can access the same types of innovative
products now available to citizens of other advanced countries.
Encourage FSS to allow small companies to use the industry's average expense ration in
the development of rate submissions so as to stimulate the introduction of sophisticated
insurance products and promote a competitive level playing field.
Reorient the FSS regulatory process to focus on proper disclosure and the financial
viability (solvency) of insurance providers, not on product micromanagement.
Amend the current regulation to allow foreign insurers and small domestic insurers who
do not have Korean market experience data to report rates based on overseas statistics,
thereby abolishing the comparative advantage of large local insurers that have their own
local experience table.
Deregulate the current prohibition on out-bound sales in bancassurance.
Consumer Choice, Competition and Safety
While AMCHAM fully supports consumer protection, safety and choice, there is a clear
difference in philosophy on how this protection can best be achieved. AMCHAM believes that
the best way to protect consumer interests is by ensuring insurance company solvency,
transparency, competition and choice, as well as clear disclosure of product and service features
and risks.
Although the government and FSS leadership promote the same basic approaches, actual
implementation seems to vary which actually eliminates consumer choice. The result of this
approach is illustrated by the following:
-Waiting periods for certain insurance products are not allowed under current regulation
even though these are common in all developed insurance markets. This regulation is
depriving Korean consumers of very valuable products because companies will not
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develop products, which, without a waiting period, can easily be abused by dishonest
customers.
-Certain laws protect dishonest customers and transfer the financial burden through
increased costs to the great majority of law abiding and needy clients. An example of this
is a case where a customer makes a claim on a policy and during the claim investigation,
it is discovered that the customer did not disclose material information about the
customer’s true health condition on the application. If the claim is not related to this
original health condition, the insurance company must not only pay the claim but also
return 100 percent of the client’s past premiums plus interest if it wants to cancel the
policy.
-FSS strongly suggests that companies resolve all of their customer complaints in the
customer’s favor irrespective of policy terms or conditions. While it is in the company’s
interest to resolve most customer complaints to the customers’ satisfaction, invalid or
fraudulent complaints should be investigated and rejected with a full explanation.
-Currently, the Customer Complaints Index announced by FSS is obtained by the number
of complaints filed to each insurer divided by the premium income. This results in a
comparative disadvantage to small and medium sized insurers, including foreign firms.
An alternative methodology that is fair and acceptable to every insurer is needed.
An issue of increasing concern, which has not been addressed by the revised Insurance Business
Law, is the unfair competition against both domestic and foreign insurance companies by so-
called “quasi-insurance companies.” These include the Post Office and certain agricultural
cooperatives, which are regulated by their current ministry or agency of jurisdiction (i.e., outside
the purview of the Insurance Business Law), the Enforcement Decree and Working Rules, not to
mention the Insurance Business Supervisory Regulation. Moreover quasi-insurance companies
are not supervised by FSS. These entities are permitted to offer products in direct competition
with insurance companies but are not subject to the same solvency, risk management, licensing,
capitalization, compliance, product approval, tax or any other regulatory requirements that apply
to private sector providers. This creates an unequal regulatory playing field between private
sector insurers and quasi-insurance companies. It is also contrary to the spirit of the WTO
General Agreement on Trade in Services (GATS) which requires that treatment accorded to
domestic companies should also be the same as that provided to companies of other member
countries doing business in Korea. Additionally the favorable treatment of the quasi-insurance
companies is contrary to the Monopoly Regulation and Fair Trade Act, under which there is
supposed to be fairness and free competition among goods and service providers. AMCHAM
recommends accelerated efforts to accord equal regulatory and tax treatment to all insurers
competing in the market place, regardless of whether they are quasi-insurance companies or
private firms.
Recommendations:
Establish a task force of FSS and insurance company senior representatives, including
representatives from foreign companies, to undertake a review of the effects of the current
insurance regulations on competitiveness, consumer choice and protection.
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Abolish the ban on waiting periods for product regulation and the practice of refunding
past premiums in cases where policies are cancelled for clear and material
misrepresentation or fraud.
Enact non-disclosure regulations in line with those found in other markets to provide
companies with a means to fight fraud.
Create a venue overseen by FSS and with participation by all insurers, domestic and
foreign, to discuss and establish an alternative method to determine the Consumer
Complaints Index.
Provide a truly fair and competitive environment by requiring that all entities providing
an insurance product be subject to the same standards, laws, regulations and taxation.
Communications, Company Operations and Other Issues
A positive trend in the past year has been the willingness of FSS and KIDI to engage in
constructive communication with company presidents under the sponsorship of the Korean Life
Insurance Association and the Korea Non-Life Insurance Association. While we are pleased with
this development and hope that it can be further expanded, there remains considerable work to be
done in improving the day-to-day communication between the working levels of FSS and
industry. The format for official communications from FSS does not take into consideration the
management processes, plans or costs of insurance companies. This is an issue that is closely
related to the increasingly intrusive role of FSS in company operations. Part of this seems to be a
“one-size-fits-all” approach to industry that fails to recognize the impact of a decision on a
company or the fact that foreign companies might already have stringent financial and
compliance requirements by virtue of their multi-national organization status. Another cause of
this problem may stem from the lack of experienced FSS staff who understand company
operations. Examples of this include:
-Recent discussions concerning the disposition of unclaimed policy proceeds (surrender
values) maintained by life companies. The proposed solution is another expensive
functional addition to company homepages that will have a disproportionate impact on
smaller carriers who are not part of the problem. This entire issue could be avoided if
Korean policies contained non-forfeiture provisions as commonly exist in other countries
that apply unclaimed policy values to extend the coverage period after a policy lapses or
is cancelled.
-While AMCHAM members fully support high compliance standards for the Korean
insurance industry, rather than dictating how the compliance function should be managed
inside the company, FSS should simply set the compliance standards and then audit
compliance.
-In response to insurers’ recommendation to strengthen disclosure obligations to
effectively prevent insurance fraud cases, the government has suggested granting broader
investigative authority to FSS. Such a measure would only further aggregate the Korean
insurance market, already known to be excessively regulated.
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-When laws or regulations are being enacted or amended, public comment procedures are
intended to increase regulatory transparency, but, in practice, they are too short to be
meaningful. In some cases, interested parties receive only 24 to 48 hours to respond to
public comment requests. Sometimes companies in the affected industry are not given any
explanation of the background or purpose of new or amended regulations in any
meaningful time frame by the relevant government agency (i.e., MOFE or FSS). Nor are
they provided with feedback on public comments they had provided as a result of the
request.
On the issue of the appointed actuary, AMCHAM believes that this development is an important
step in improving the management of the insurance industry and building up advanced actuarial
standards in Korea. Ideally, the company should seek actuarial advice prior to the directors
approving any critical issues such as premium rates and each year’s dividend distribution. Such
actuarial advice could be in a compulsory format such as the pricing and financial condition
reports required in other parts of the world. This will not only contribute to local actuaries
raising their standards but also put the responsibility where it belongs—on the directors. Such
reports would be open to the scrutiny of FSS (post event) to ensure they are accurately and
appropriately prepared and that the directors have not applied undue influence on the actuary.
We believe that the FSS mandate on the reduction in standard acquisition loading used in the
calculation of cash surrender value will force a reduction in the amount of commissions paid to
producers. This is not only contrary to the avowed intention of a deregulated pricing environment
but will have an impact on the ability of industry to attract professional level producers, thereby
reducing the ability of industry to assist consumers in properly assessing their insurance needs
and presenting suitable solutions for those needs.
Finally, as an issue related to the government’s plan to develop Korea as a financial hub for
Northeast Asia, we note the requirements under the Protection and Usage of Credit Information
Law (PUCIL) and the Presidential Decree which state that while a company is allowed to
outsource data processing to local corporations, the law prohibits foreign companies or branches
from sending their customer data to any of their affiliates overseas even for purely data
processing purposes, due to the requirement that the third party be a chusikhoesa incorporated
under the Commercial Code of Korea. A number of financial institutions with global operations,
including insurance companies, often have a consolidated data center in one country to maximize
cost-efficiency but also to allow central expertise with latest security and global standard
technology to protect customers. AMCHAM believes that the above PUCIL restriction will only
lead to the impression that Korea is a country with regulatory hurdles to doing business, which
conflicts with Korea’s aspiration to become the Financial Hub of Northeast Asia.
Recommendations:
Establish a formal process by which foreign expertise, resident in foreign-invested
companies operating in Korea and international consulting firms, is included in the policy
making process by FSS and other regulators for the development of the insurance
industry.
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Establish a proper communications process for changes in regulation and regulatory
authority directives. This must include circulation of drafts, pre-notice periods and
sufficient time to implement new regulations.
Recognize that foreign insurers operate in a stringent international compliance
environment and withdraw the detailed management requirements for the execution of the
compliance officer function.
Implement the appointed actuary system according to the international consulting
recommendations made to FSS as a first step.
Do not restrict acquisition loading and instead rely on the free market to assure that
competitive products are provided to consumers.
Amend the current regulation to allow global financial institutions to have consolidated
data centers overseas rather than limiting the data transfer to domestic corporations.
Conclusion
The adoption of the recommendations in this paper will create an insurance industry that is
financially sound, provides insurance consumers with access to properly priced products and
elevates the regulation and operation of the industry to international standards. It is recognized
that it is not practical to implement all of these changes immediately, and that a phased approach
may be required. As such, AMCHAM recommends that a priority list and timetable for the
implementation of the recommendations be created and that they be implemented over a three-
year period.
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