An amended version of the Insurance Business Supervisory Regulations (the “IBSR”) took effect on April 17, 2020 to allow insurers to utilize coinsurance as a means of restructuring insurance exposures. This amendment was made in preparation for IFRS 17 and K-ICS (a new system of measuring an insurer’s risk-based capital (the “RBC”)) that are scheduled to be implemented in the insurance sector starting from 2023.
Coinsurance is a type of reinsurance contract under which savings premiums and risk premiums may be ceded, thereby transferring to reinsurers not only the coverage risk, but also the interest rate risk and policy surrender risk. Therefore, insurers can use coinsurance to improve their financial soundness. For this same purpose, when calculating the RBC ratio for an insurer, the financial supervisory authorities will exclude the interest rate risk that is ceded to a reinsurer through a coinsurance transaction, from the original insurer’s interest rate risk.
The amended IBSR only allows proportional coinsurance, a type of reinsurance whereby the ceding company and the reinsurer share risks and premiums on a predetermined ratio. When an insurer signs up to a coinsurance policy or the terms of such coinsurance policy are amended, the cedant must report this to the Governor of the Financial Supervisory Service within a month.
Meanwhile, the National Assembly passed a proposed amendment to the Insurance Business Act (the “IBA”) at the plenary session on April 29, 2020. The amendment has increased the ceiling for investment in foreign-currency denominated assets to 50% for both the general and separate accounts of insurers to allow them more liberty in making financial investments in foreign assets. Before the amendment, an insurer’s investments in foreign currency assets were limited to 30% for its general account and 20% for its separate accounts. These low caps had constantly generated concerns that they were placing undue restrictions on the insurers’ discretion and flexibility in efficiently managing their assets. Therefore, the IBA was revised to relax the restrictions. The amended IBA will come into effect six months after the promulgation of the amendment.
By introducing coinsurance and relaxing the limits on insurers’ investments in foreign assets, the change is expected to improve insurers’ financial soundness despite the persistent financial difficulties caused by low interest rates. In this regard, we advise you to constantly monitor the developments in the insurance market following implementation of the amended IBSR and the proposed amendment to the IBA, while also examining any potential issues arising from the regulatory changes.
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