As a follow-up measure to the recent policy change permitting coinsurance, whereby pursuant to an amendment to the Insurance Business Supervisory Regulations in April 2020 insurance companies can cede the risk associated with the savings portion of insurance premiums to reinsurance companies, the Financial Services Commission has proposed amendments to the Detailed Enforcement Rules for Insurance Business Supervisory Regulations to, among others, establish the criteria for calculation of the risk amount under the risk-based capital (“RBC”) regime for coinsurance contracts and to newly establish the guidelines for liability adequacy test (“LAT”) for coinsurance transactions. These proposed amendments will be implemented after consideration of interested parties’ opinions. The key points of the proposed amendment are as follows:
1. Criteria for RBC calculation for coinsurance contracts
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Calculation of the standard amount of solvency margin by taking into account coinsurance transactions
- Measure interest rate risks in consideration of the effect of transferring interest rate risks through coinsurance;
- Measure insurance risks by taking into account the cession of business through coinsurance; and
- Measure credit risks for reinsurance assets and prepaid expenses in connection with the coinsurance contract -
Preparation of standards to recognize solvency margin with respect to the difference between book value and market value
- The difference paid by the direct insurer to the reinsurer shall be treated for accounting purposes as the direct insurer’s prepaid expenses in which case the entire amount shall be regarded as solvency margin.
- However, if the result of the LAT shows that additional policy reserves are required, an amount equal to 40% of such reserves shall be recognized as solvency margin.
2. LAT for coinsurance contract
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The LAT shall be performed separately with respect to coinsurance contracts and additional amounts shall be reserved in case the results of the LAT show that there are insufficient policy reserves.
- No set-off is allowed between the results of LAT on the coinsurance contracts and the results of other insurance contracts, and if additional policy reserves are needed for coinsurance contracts, such reserves can be set off against the prepaid expenses or unearned income.
3. Supplementation of evaluation guidelines for insurance risk transfer and supplementation of report on reinsurance contract
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To stipulate that "reinsurance contracts designed to compensate a reinsurer’s losses or guarantee a specified amount of income through a separate arrangement" is a type of insurance contract that does not transfer insurance risks.
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To require that the documents attached to the report on reinsurance contracts which insurers submit to the Financial Supervisory Service include "a certification from the reinsurer to the effect that there is no side agreement."
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