In November 2022, financial regulators announced a plan to improve existing insurance regulations (the “Improvement Plan”) in order to enable the insurance industry to respond to market demands for new services with more flexibility and to resemble the business model that the market desires. In addition, the Financial Supervisory Service (the “FSS”) announced its plans to improve its supervision and audit system (the “Improved Supervision System”) in order to enhance the predictability of regulatory procedures and to strengthen the protection of the rights and interests of officers and employees at financial companies. The key details of the Improvement Plan and the Improved Supervision System are summarized below.
1. Support Structural Reforms in Response to Digitalization
The Improvement Plan proposes the relaxation of the “one company, one license” policy that allows only one life and one non-life insurance company from the same insurance group to enter the respective insurance market, and encourages the market entry of new insurers that specialize in certain niche products. Specifically, subsidiaries and affiliates of existing insurance companies will be permitted to enter the insurance market as small-amount, short-term insurers or mono-line insurers specializing in products that conventional insurers do not typically handle. Furthermore, in the case of insurance companies offering these niche products, captive solicitors of the existing insurance companies will be permitted to solicit sales for such subsidiaries or affiliates.
In addition, marketing regulations will be relaxed to facilitate digital and non-face-to-face insurance solicitation. Accordingly, the regulations that will be applied to video call solicitations and hybrid solicitations (which involve a combination of telemarketing and cyber marketing) will be less stringent compared to regulations on other types of non-face-to-face marketing.
2. Allow Managerial Autonomy of Insurance Companies
To allow insurance companies to freely develop diverse products, the Improvement Plan suggests an increase in the current ceiling on special benefits provided in the form of goods or services that can reduce the risks related to the occurrence of accidents. Therefore, if the risk-mitigating effect of such goods and services can be demonstrated in an objective and statistically verifiable manner, the current cap on the amount of special benefits of KRW 30,000 will be eased to KRW 200,000. In addition, the Improvement Plan strives to relax the regulations on cash surrender rates for annuity insurance (the current regulations state that the surrender value must always exceed the premium paid). Accordingly, annuity policies with higher annuities than existing insurance products will be exempt from the cash surrender rate regulation.
Additionally, regulations on asset management will also be eased. The rule that limits the amount of investment in derivative products to 6% of the total amount of assets will be abolished to help insurance companies build efficient portfolios. Further, the issuance cap (a rule prescribing that the amount of issued bonds cannot exceed 100% of the insurer’s shareholders’ equity) will be removed for bonds issued for refinancing.
3. Improve Supervision System and Expand Private Infrastructures
According to the Improvement Plan, regulations that place excessive sanctions on insurers will be amended. For instance, even when insurance companies violate their obligation to comply with some of the policy documents, they will only be subject to administrative fines if such violations have affected consumers negatively or led to unjust enrichment (in case of unjust enrichment, the administrative fine will be proportionate to the amount of enrichment).
Meanwhile, a foundation to expand private infrastructure, including insurance associations, will be established to make services more accessible. Accordingly, simple complaints that are less likely to cause disputes will be delegated to insurance associations. A legal basis that permits insurance associations to counter and respond to insurance fraud will also be introduced.
4. Enhance Predictability and Transparency of Regulatory Procedures
Under the Improved Supervision System, the FSS will notify relevant financial companies regarding regular audits in advance at the beginning of every year. When the audit period is extended, the FSS will notify the extended period at least one day prior to the closing of the audit (three days for regular audits). To expedite the processing of no-action letters, for any matter that involves multiple departments, the to-be-established Expedited Process Committee will determine which department should take charge of the matter within five business days from the date of receipt of the no-action letter request. If the processing takes more than a certain period of time after the receipt, the FSS will refer the matter to the Committee for Deliberation on No-Action Letters. To ensure the timeliness and integrity of no-action letters, the FSS will appoint IT experts as committee members when reviewing IT-related issues.
5. Strengthen Protection of the Rights and Interests of Officers and Employees at Financial Companies
The Improved Supervision System will expand sanctioned parties’ right to defend. Accordingly, from the date a party receives an advance notice of a contemplated sanction, the sanctioned party will be permitted to copy its responses to questionnaires, written confirmations, and statements already submitted to the FSS, and to access materials that will serve as evidence for the contemplated sanction. The Sanction Deliberation Committee will also try to minimize the waiting time for attendants by reducing the number of items to be deliberated.
As the financial regulators have announced that they will immediately implement the measures that can be implemented swiftly in accordance with the Improvement Plan and the Improved Supervision System, as well as promptly amend relevant regulations and implement guidelines, we recommend monitoring the progress on the proposed amendments.