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Newsletter | April 2015, Issue 1
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INSURANCE
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Promulgation and Enforcement of the Amended Insurance Business Supervision Regulation
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As a follow-up to the “Measures to Reform and Improve the Insurance Business” announced by the FSC on July 15, 2014, the amended Supervision Regulation was promulgated by the FSC and became effective on December 31, 2014. Provisions relating to the requirements for monoline insurance agents, solicitation records of insurance solicitors and image advertisements were separately promulgated and entered into force as of January 20, 2015 in consideration of the amendment schedule of the Enforcement Decree of the IBL. A summary of the amendments to the Supervision Regulation as promulgated and made effective as of December 31, 2014 are set out below.
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Amendments relating to Financial Soundness
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Improvement on Calculation/Application Methods for Rates
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The calculation method for a Standard Rate was amended to reflect the trend in market rates in order to force the accumulation of adequate levels for reserves. The detailed calculation methods are set out in the Insurance Business Supervision Rules.
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The amended Supervision Regulation permits a financially sound insurer (i.e., with a solvency margin ratio of 150% or more) to set higher standard rates by 0.25% in order to promote insurance premium competition while taking into account that a higher standard rate may lead to a decrease in insurance premium.
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The amendment also provides greater discretion for insurers by expanding the adjustable range of publicly disclosed rates (i.e., ±10% → ±20%).
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Recognition of Liabilities (Deferred Income Tax as part of Contingency Reserves) for Solvency Margin
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Deferred income tax, which is booked as a liability for purposes of paying taxes in the future in connection with contingency reserves, was originally to be excluded from the calculation of the solvency margin starting this year. However, it was determined that deferred income tax will continue to be recognized as a factor for the solvency margin formula considering its role as capital buffer and international trends.
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Strengthening Insurer Solvency Margin
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The solvency margin requirement will be gradually strengthened through 2016 in consideration of the adoption of fair market value evaluation of liabilities (2018 IAS) and the international evaluation schedule. Details of such requirement will be separately provided for in the Insurance Business Supervision Rules.
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Relaxed Standards for Credit Extensions in connection with Derivative Transactions between Insurers and Affiliated Financial Companies
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In the event that an insurer entrusts a derivatives transaction to its affiliated securities company and the account balance exceeds the entrusted deposit, then such excess amount will not be included in the calculation of credit extension amount until the next business day. This provision takes into account the fact that same-day withdrawal is impossible although, in principle, such same-day withdrawal is required for the money to be excluded from the calculation of credit extension amount.
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Limitation exemption for a derivatives transaction for purposes of risk hedging
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A derivatives transaction for purposes of risk hedging, variable life insurance, and foreign currency reserves (inclusive of reinsurance assets) are exempt from any limitations on the amount of derivatives transaction of insurers.
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Amendments relating to rationalization of regulations
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Expansion of Transfer from General Accounts to Special Accounts
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Initial investment amounts placed in a general account are now permitted to be transferred to special accounts that can be operated by an insurer in order to improve flexibility and efficiency in fund management. The ability to do so is not limited to variable insurance, performance-based pension insurance or long term non-life insurance contracts.
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Special Treatment of Insurer Investments in a PEF
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In the event that an insurer acquires, as limited partner, shares of up to thirty percent (30%) in a private equity fund (i.e., PEF), the insurer will be permitted to own such shares without undergoing a separate reporting process with the Korean regulators. Previously, such special treatment had been granted only for investments in venture capital funds for small/medium businesses and new technology businesses, and the Korea Venture Fund.
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No Obligation to Submit Documents in connection with Guarantees to Subsidiaries
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As an exception to the prohibition on providing debt guarantees to third parties, an insurer is permitted to provide a debt guarantee to an overseas subsidiary which engages in the insurance business under certain circumstances. In such case, the insurer is no longer obligated to submit relevant documents to the Chairman of the FSC in advance.
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Extended Grace Period for Assessment of Overseas Branches
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The grace period of two (2) years has been extended to five (5) years for the assessment of business management of a newly established overseas branch of an insurer in consideration of the high entry barrier and initial investment amount, etc. In effect, the overseas branch office of the insurer will not be subject to assessment for the first five (5) years of its establishment and operation.
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Reasonable Calculations for Debt Ratio of Large Shareholders
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An increase or decrease of capital will be reasonably reflected in the calculation of the large shareholders’ debt ratio in a timely manner for such capital increase or decrease during the period from the end of the immediately preceding fiscal year to the application date of the insurance business approval.
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Improvement of Insurer Internal Regulations on Lending Rates
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Insurers are now required to have detailed procedures and standards for the calculation and management of lending rates in their internal regulations.
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Reasonable Standards for FX Transactions by Insurers
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An insurer is permitted to acquire up to fifteen percent (15%) of the outstanding shares in an overseas company whose business is insurance-related and is not listed or registered in the foreign securities exchange market.
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An insurer is permitted to acquire foreign-denominated shares in domestic PEFs.
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