On December 18, 2019, the Financial Services Commission (the “FSC”) amended the Insurance Business Supervisory Regulations (the “Amended IBSR”) to relieve the regulatory burden in the insurance industry. The amendment will take effect immediately and the key changes under the Amended IBSR are outlined below:
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Less items to explain when telemarketing
The Amended IBSR relaxed the previous regulation on telemarketing to allow insurance telemarketers to inform customers of certain matters such as dispute resolution procedures, through text messages or e-mails, in lieu of explaining everything verbally.
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Expanded eligibility for registration as add-on insurance agent
Under the Amended IBSR, even a corporate entity with 15% or more of its shares held by a financial institution has now become eligible to register as an add-on insurance agent (i.e., an agent that solicits sale of solely the non-life insurance products connected to the goods or services it sells).
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Relaxed regulations on insurers’ asset management requirements
Insurance companies are now allowed to sell repurchase agreements (“RP”) to make daily settlements under derivative transactions that were entered into to hedge the guarantee risk of their variable insurance products, as long as the RP amount does not exceed the insurers’ equity capital.
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Calculation of foreign currency dealing positions of hybrid securities
Under the new regulations, foreign currency-denominated hybrid securities issued by an insurance company are now accounted for as liabilities, which may be set off against the insurer’s foreign currency assets, when calculating the insurer’s foreign currency dealing position.
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Revised scope of “professional policyholders”
The Amended IBSR clarified the scope of the term “professional policyholder” by expressly capturing: local-municipality-owned enterprises, institutions established under any special act and businesses employing five or more persons.
Further, the FSC announced another partial amendment to the IBSR (the “Subsequently Amended IBSR”) on January 15, 2020 to improve the industry’s practice of paying insurance sales commission to agents. The key changes implemented in the Subsequently Amended IBSR are outlined below:
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Improvement of insurance sales commission system
To prevent excessive competition among insurance companies and establish sound order of insurance solicitation, the scope of “commissions” has been broadened to include money and goods in any form provided in furtherance of sales. At the same time, the Subsequently Amended IBSR requires inclusion of the “criteria for payment of commissions” inside the basic documents to ensure that such criteria are clearly defined in advance. Further, the sum of first year sales commissions payable to an agent is not permitted to exceed the aggregate amount of insurance premiums paid by the policyholder during that year. In addition, sales commissions shall be paid in installments instead of a balloon payment upfront.
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Cap on business expenses for renewable policies
Insurance policies that may be renewed or re-subscribed after expiration neither require insurance companies to make new solicitation efforts nor require another underwriting process. Therefore, to rectify the issue of allocating business expenses simply in proportion to the total size of premium, the business expenses of insurance policies that are renewed or re-subscribed to are not allowed to exceed 70% of the business expenses under the initial term.
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Mandatory disclosure of products whose business expenses exceed surrender charge limit
If business expenses for an insurance product are allocated to surpass the permissible limit of surrender charges, the amount of such business expenses must now be disclosed to the public. The purpose of this requirement is to eventually eliminate from the market those insurance products allocating excessive amount of business expenses to incentivize agents.
The Subsequently Amended IBSR became effective on January 15, 2020. The revised insurance sales commission regime under the Subsequently Amended IBSR, specifically regarding face-to-face channels, will take effect on January 1, 2021, while that for non-face-to-face channels will become effective on January 1, 2022. Accordingly, we advise insurers to closely monitor the actual implementation of this new regime and potential issues arising from the changing regulatory landscape.