The Financial Services Commission (“FSC”) has amended the Insurance Business Supervisory Regulations (“IBSR”) to, among other things, introduce regulations on reinsurance.  

Key Aspects of the Amendment & Implications: 

1. Introduction of reinsurance management standards and internal control standards 

In order to reflect the international standards for insurance companies’ management of reinsurance risks presented by the International Association of Insurance Supervisors (“IAIS”), insurance companies will be required to establish and operate reinsurance risk management strategies and internal control standards.

2. Introduction of minimum retention ratio of general non-life insurance 

A non-life insurance company will be required to retain at least 10% of each type of general non-life insurance (excluding automobile insurance), except where the risk management committee of the company determines that it is difficult to hold 10% or more such insurance.  As a result, excessive reinsurance cessions through fronting arrangements will be restricted. 

3. Establishment of legal grounds for reinsurance listing system  

The amended IBSR has established legal grounds for the “eligible reinsurer listing system” whereby the Korea Insurance Development Institute maintains a list of “eligible” reinsurers who have submitted evidence of their financial soundness. 

4. Permission for non-statistical rate and discount/extra charge for reference net insurance premium rates 

The amended IBSR expressly specifies that insurance premium rates other than statistical rates may be used for commercial insurance and certain individual insurance.  Also, under the amendment, IBSR provides specific grounds for discounts or extra charges for the reference net insurance premium rates with respect to such types of insurance.

5. Permission for reinsurer net insurance rate method when concluding reinsurance contract 

Under the amended IBSR, the reinsurer net insurance rate method can be used when concluding a reinsurance contract in order to promote competition on operating expenses among insurers and differentiation of market prices.  As a result, insurers will be able to use the direct written premium after deducting operating expenses such as reinsurance ceding commission as the ceded reinsurance premium. 

6. Rationalization of regulation on sales proportion of financial institution insurance agencies 

The existing calculation method of the “direct written premium” for general non-life insurance under the bancassurance 25% rule has been changed to the calculation method of the “monthly direct written premium (i.e., insurance premium calculated by dividing the total direct written premium by the number of months in the insurance period).”  

Due to such change of calculation method, the balance between life insurance and long-term policy (based on the first monthly direct written premium) and short-term non-life insurance will be restored.