The Financial Services Commission (the “FSC”) and the Financial Supervisory Service (the “FSS”) held the Third Insurance Reform Conference on September 26, 2024, to discuss measures to promote healthy competition in the insurance industry and strengthen insurers’ internal controls.
Unhealthy competition has become an issue in the insurance industry due to the recently heightened sales competition in pursuit of short-term gains, accompanied by financial incidents such as embezzlement. This has led the FSC and the FSS to push forward (i) a plan to implement measures for the purpose of promoting healthy competition in the insurance industry, ensuring sufficient coverage for consumers and reducing insurance premiums, as well as (ii) a plan to implement measures to strengthen insurers’ internal controls to prevent consumer harm and enhance their internal controls’ effectiveness.
The key details of the measures to promote healthy competition in the insurance industry and to strengthen the internal controls of insurers (collectively, the “Measures”) are as follows:
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1.
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Measures to Promote Healthy Competition in Insurance Industry
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A.
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Strengthening of Risk Management Process for Insurers
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A Chief Product Officer, Chief Risk Officer, Chief Compliance Officer and Chief Consumer Officer, among others, will need to be included as members of the product committee.
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The product committee will be obligated to act as a control tower, overseeing all product matters, including product planning, launch and post-sales management.
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The product committee will be required to report the details of their deliberations and decisions to the representative director and retain meeting materials, including minutes, for at least ten years.
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To enhance the effectiveness of third-party verification on the adequacy of insurance premiums and risk (mortality) rates when developing insurance products, an insurer will be required to (i) develop a manual that outlines the verification procedure and includes a standard verification template, (ii) adopt a standardized verification procedure, and (iii) establish key indicators to assess the verification quality of the relevant actuarial firm (e.g., track record of verification, total headcount and the number of personnel/hours allocated to verification) and disclose the verification results on the website of the Institute of Actuaries of Korea.
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B.
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Review of Reasonable Coverage Limits
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For products that require the filing of reports, insurers will be obligated to specify the calculation basis of coverage limits in their product reports. For products that are not subject to the filing requirement and have a higher risk of a moral hazard (e.g., attorney’s fees in the case of driver’s insurance, daily allowances for hospitalization or outpatient/nursing care and influenza insurance), insurers will be obligated to specify the coverage limit in the basic documents of such products.
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C.
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Creation of Environment That Promotes Healthy Competition
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Arbitrage prohibition period: The prohibition period will be extended from one year to the entire term of each insurance policy.
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Criteria for determining arbitrage: The extent to which an insurance agent has engaged in arbitrage will be determined based on all types of support expenses made to the agent other than sales commissions.
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2.
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Measures to Strengthen Internal Controls of Insurers
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A.
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Establishment of Guidelines to Prevent Financial Incidents by Insurers
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Employees conducting high-risk activities will be prohibited from engaging in these activities continuously over a long period (i.e., five years). They will be placed on mandatory leave at least once a year.
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Insurers will be required to assign multiple employees and departments to deal with transactions that involve a high risk of financial incidents.
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Each insurer will be required to have at least 1% of its officers and employees assigned as “compliance personnel” and have at least 50% of the compliance personnel consist of experts (e.g., certificate holders, holders of master’s degrees or higher, or individuals with relevant experience).
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Insurers will be required to establish (i) a real-time monitoring system to detect irregular transactions that pose a high risk of financial incidents, and (ii) a procedure to verify whether documents submitted by consumers have been forged or altered.
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B.
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Strengthening of Internal Controls to Prevent Insurance Fraud
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Insurers will be required to conduct an insurance fraud risk assessment based on the details and limits of each type of coverage and have the assessment results reviewed by their product committees.
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Insurers will be required to determine policyholders’ coverage limits by considering the aggregate of other existing policies’ coverage limits.
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When determining the limits of death coverage, insurers will be required to consider whether the amount of paid premium is appropriate to the insured’s income. Further, they must strengthen the underwriting and review process to detect redundant or excessive insurance purchases.
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The financial regulators announced that the parts of the Measures that insurers can independently implement would be effective by the end of 2024. Other parts of the Measures that require legislative amendments will enter into force following such amendments in the first half of 2025. Accordingly, it is essential for insurers and other stakeholders in the insurance sector to keep an eye on the legislative developments and fully prepare for the enforcement of new laws and regulations.
[Korean Version]
