On the newest episode of “The Standard Formula,” host Rob Chaplin is joined by associate Chiara Iorizzo to discuss the prudential regime of South Korea, the seventh-largest market in the world. During the discussion, the pair provide an overview of how the insurance sector is regulated in the country, as well as its main prudential capital standard and corporate governance requirements, and examine how South Korea’s regime compares to countries around the world.
Episode Summary
South Korea’s insurance industry is estimated to be the seventh-largest globally, with high market concentration: three life insurers hold approximately 50% of the life insurance market while the top four non-life insurers control about 70% of the non-life market. In this episode of Skadden’s yearlong podcast series on global insurance regulatory regimes, host Rob Chaplin and colleague Chiara Iorizzo explore South Korea’s robust, multilayered regulatory framework. Tune in for their detailed analysis of the country’s regulatory and prudential regimes and observations about how the country aligns with global insurance standards.
Key Points
- Regulatory Regimes: The Financial Services Commission, or FSC, sets policy and issues licenses, while the Financial Supervisory Service, or FSS, handles day-to-day oversight and examinations.
- Prudential Regime: The cornerstone of Korea’s prudential regime is the Korea Insurance Capital Standard, or KICS. Under the Insurance Business Law, insurers must maintain a KICS solvency ratio of at least 100%. In practice, the FSS encourages insurers to keep this ratio at 130% or higher.
- International Alignment: Korea’s KICS is based on the IAIS Insurance Capital Standard, with detailed calibrations tailored to the Korean insurance market. Since Korea referenced the EU’s Solvency II in preparing KICS, the two frameworks share many similarities.
- Insurance Liabilities: Korea’s International Financial Reporting Standards Insurance Contracts introduces a market-to-market approach for insurance liabilities. This represents a significant shift because it requires current risk-adjusted estimates of future cash flows and separates insurance service results from finance, income or expenses.
Voiceover (00:01):
From Skadden, The Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.
Robert Chaplin (00:18):
Welcome back to The Standard Formula podcast. Today, we are continuing our global tour of insurance regulatory capital regimes, and our focus is on Korea, one of Asia’s largest and most dynamic insurance markets. I’m Rob Chaplin, and joining me today is my colleague Chiara Iorizzo. Chiara, great to have you with us.
Chiara Iorizzo (00:38):
Thanks, Rob. I’m excited to be here to discuss Korea’s prudential solvency regime. We’re extremely grateful to our good friends at Kim & Chang in Korea for the review of this script for this podcast.
Robert Chaplin (00:48):
Great. Let’s start with the basics. Chiara, can you provide a brief overview of the Korean insurance market, please?
Chiara Iorizzo (00:56):
Of course. South Korea’s insurance industry is estimated to be the seventh-largest globally. The industry is divided into life and non-life insurance, with accident and health insurance classified as a separate Type 3 category. Both life and non-life insurers can offer Type 3 insurance if they are properly licensed for all types of life insurance products or non-life insurance products. Market concentration is high, with three life insurers holding approximately 50% of the life insurance market while the top four non-life insurers control about 70% of the non-life market.
(01:36):
Life insurance is predominantly sold through face-to-face channels, with bank assurance and company employees being the most significant distribution methods. Non-life insurance also relies heavily on face-to-face sales, with insurance agents and company employees serving as the main channels. The industry is closely supervised by the Financial Services Commission, or FSC, which sets policy and issues licenses and the Financial Supervisory Service, or FSS, which handles day-to-day oversight and examinations. The Insurance Business Law, or IBL, provides a statutory basis for industry regulation covering licensing, acquisitions, product and marketing regulations, asset management, prudential standards and procedures for dissolution or transfer. The Commercial Code governs the contractual and private law aspects of insurance agreements. The FSC and FSS also issue additional regulations and guidelines. The Financial Consumer Protection Act, or FCPA, enacted in 2020 further regulates insurers sales and marketing practices to protect consumers.
Robert Chaplin (02:49):
Thanks, Chiara. Now let’s discuss in more detail the regulatory framework in Korea and who the key players are.
Chiara Iorizzo (02:57):
Certainly. Korea’s insurance regulatory framework is robust and multilayered. As mentioned, the primary regulators are the FSC, which is the primary government authority responsible for policymaking and licensing in the banking, insurance, securities and asset management sectors. It has the power to issue business licenses and impose severe sanctions, such as license revocation, business suspension, fines or disciplinary actions against individuals in cases of legal and regulatory violations. The FSS, which is not a government agency, but rather a private organization, acts as the executive arm of the FSC and is responsible for the day-to-day supervision and examination of financial institutions. The FSS can conduct regulatory audits and, if violations are found, impose lighter sanctions such as warnings or cautions on institutions and their employees.
(03:53):
Foreign companies aiming to operate an insurance business in Korea must either form a local subsidiary or open a branch office. In both cases, it must secure authorization from the FSC by fulfilling all applicable regulatory standards. So a subsidiary, a foreign insurer must demonstrate that it is already licensed and actively engaged in the same line of insurance as the one intended for the Korean market, that its total capital is at least three times the amount it plans to invest in the Korean subsidiary, that it holds an investment-grade rating from a reputable international credit rating agency and complies with the financial health requirements of its home jurisdiction, that there have been no significant regulatory sanctions or criminal convictions related to the insurance activities within the past three years, and that a subsidiary will employ competent professionals and have appropriate information technology infrastructure to support its operations.
(04:53):
Branches are subject to similar standards, with the added restriction that their operating funds must not be raised through borrowing. The minimum capital for a subsidiary is 30 billion South Korean won, though this threshold may be lowered if the subsidiary’s scope of business is limited. For branches, the minimum required operating funds are 3 billion won. Any entity seeking to acquire 10% or more of the voting shares in a Korean insurance company must obtain prior approval from the FSC. Foreign investors must meet the same standards regarding industry experience, credit worthiness and compliance history as those required for establishing a subsidiary. Any change in shareholding of 1% or more must be reported to the FSS and the FSC periodically reviews the qualifications of the largest individual shareholders every two years.
Robert Chaplin (05:47):
Thanks, Chiara. Let’s turn to the core of the Korean solvency regime. So Chiara, what’s the main prudential capital standard for insurers in Korea?
Chiara Iorizzo (05:58):
The cornerstone of Korea’s prudential regime is the Korea Insurance Capital Standard, or KICS. Under the IBL, insurers must maintain a KICS solvency ratio of at least 100%. In practice, the FSS encourages insurers to keep this ratio at 130% or higher. The KICS is a risk-based capital framework requiring insurers to hold capital against interest rate risk, market risk, credit risk, operational risk and insurance risk, or reflected in the calculation of required capital. If an insurer’s KICS ratio falls below the minimum, the FSC has broad powers to take prompt corrective action. This can include requiring the insurer to raise capital, dispose of assets, close sales offices, merge or transfer business. The regime is designed to ensure that insurers remain financially sound and can meet their obligations to policyholders. Rob, could you please take us through the corporate governance requirements for insurance companies and other financial institutions?
Robert Chaplin (07:09):
Absolutely, Chiara. So the act on the corporate governance of financial companies, or the Corporate Governance Act, establishes governance standards for insurance companies and other financial institutions. The main corporate governance requirements for insurance companies include the following, insurance companies with total assets of 5 trillion won or more or 2 trillion won or more for listed companies are required to have at least three outside non-executive directors, and these outside directors must make up the majority of the board. These companies must also establish an audit committee composed of at least three directors. At least two-thirds of the audit committee members must be outside directors, and at least one member must have expertise in accounting or finance.
(08:02):
For insurance companies with total assets between 300 billion won and 5 trillion won or below 2 trillion won for listed companies, at least 25% of the board must consist of outside directors. If the combined shareholding of the largest shareholder and certain related shareholders exceeds 3% of the total issued shares, their voting rights above this threshold can’t be exercised when appointing or dismissing an audit committee member. The appointment or dismissal of audit committee members is solely determined by the shareholders. So, Chiara, please tell us what the reporting requirements are for insurers.
Chiara Iorizzo (08:43):
Sure. Insurers are subject to several reporting requirements. Each year, insurers are required to submit their annual financial statements and business reports to the FSS by the 31st of March of the following year. On a monthly basis, insurers must provide the FSS with a report detailing their business activities. These monthly reports must include, among other information, the financial statement, premium income and asset management data for the relevant month. Insurers are also obligated to submit a quarterly report to the FSS regarding their solvency margin status. Major management issues must be regularly disclosed by insurers on their official websites. Additionally, insurers must promptly report to the FSS any significant changes related to business operations such as the appointment or removal of officers, changes to the company name and increases in capital. Now, Rob, how are assets and liabilities regulated under the Korean regime?
Robert Chaplin (09:43):
Well, Chiara, Korea has implemented the International Financial Reporting Standards, IFRS Insurance Contracts 17, or IFRS 17, for insurance contracts, which introduces a market-to-market approach for insurance liabilities. This is a significant shift, especially for insurers with legacy high-interest guarantee products as it requires current risk-adjusted estimates of future cash flows and separates insurance service results from finance, income or expenses. Asset management is also tightly regulated with ceilings on asset allocations to ensure safety, liquidity and profitability. The IBL imposes specific limits on how insurers can allocate their assets. These restrictions are designed to prevent excessive concentration of risk and promote prudent investment practices. The key asset allocation limits include: an insurance company may allocate up to 25% of its total assets to real estate. Investments in foreign currency or real estate located outside Korea are capped at 50% of total assets. Holdings of stocks and bonds in any one company must not exceed 7% of the insurer’s total assets.
(11:01):
The combined amount of credit extended to a single borrower, along with any bonds and stocks held that are issued by that borrower, is limited to 12% of total assets. Investments in bonds and stocks issued by the insurer’s major shareholders or their subsidiaries are restricted to the lesser of 60% of shareholders equity or 3% of total assets. Additionally, if an insurance company intends to establish a subsidiary by acquiring more than 15% of the outstanding voting shares of another company, it must first obtain approval from the FSC or depending on the business type, submit a prior report to the FSS. So, Chiara, are there any unique features in Korea’s approach to reinsurance and risk transfer?
Chiara Iorizzo (11:48):
Yes, there are. Korea has specific rules for reinsurance and coinsurance. Ceding companies can be exempt from statutory reserve requirements if the reinsurance contract meets certain criteria, including genuine risk transfer and the reinsurer’s financial soundness. Coinsurance was introduced in 2020 to help insurers manage interest rate risk, especially in anticipation of IFRS 17. Ceding companies may be exempt from statutory reserve requirements by transferring risks to reinsurers, provided certain conditions are met. The reinsurance arrangement must involve a genuine transfer of insurance risk. The reinsurer must bear a real risk of loss. The reinsurer must meet financial soundness standards as set by its home jurisdiction’s authorities, or must have maintained at least an investment-grade credit rating from a reputable international rating agency for the past three years.
(12:48):
According to the Insurance Business Supervisory Regulation, seeding companies must report any reinsurance contract to the FSS within one month of execution if any of the following apply: the reinsurance premium is determined based on an expected investment return; the contract limits the reinsurer’s liability by reducing or removing its obligations or grants the reinsurer unilateral right to terminate or amend the contract; the reinsurer’s payment is fixed regardless of the occurrence or size of an insured event; or the contract allows the reinsurer to defer claim payments beyond the standard settlement period.
(13:26):
If a reinsurer contract does not meet these requirements or related revenues and expenses such as premiums, claims and commissions must be treated as deposits or advanced deposits, and the seeding company will not be exempt from reserve requirements. Under these regulations, a primary insurer cedes insurance liabilities through coinsurance. Those liabilities are deducted from the insurer’s exposure when calculating interest rate risk. Additionally, when assets are transferred to a reinsurer as part of a coinsurance transaction, the credit risk is assessed based on the reinsurer’s credit rating. The IBL prohibits insurance companies from providing undue benefits to affiliates in asset, finance or reinsurance transactions. Furthermore, lending to affiliates or purchasing their bonds or stock above a certain threshold requires unanimous approval from the insurer’s board of directors.
Robert Chaplin (14:21):
That’s really interesting. Thank you, Chiara. How does Korea’s solvency regime compare to other international frameworks?
Chiara Iorizzo (14:28):
Korea’s ICS is broadly aligned with international risk-based capital standards, similar in spirit to Solvency II in Europe with its own calibrations and local adaptations. The adoption of IFRS 17 brings Korea closer to global best practices, enhancing transparency and comparability. KICS aims to enhance the financial standards of insurers by requiring closer, more realistic, more volatile mapping of risks to capital, similar to the total balance sheet approach used in modern international frameworks. Korea was among the first countries in East Asia to implement stricter standards ahead of other markets such as Japan and Taiwan. Korea’s KICS is based on the IAIS Insurance Capital Standard, ICS, with detailed calibrations tailored to the Korean insurance market. Because Korea referenced the EU’s Solvency II in preparing KICS, the two frameworks share many similarities. Both models use market-consistent and fair value evaluation for insurers’ assets and liabilities and measure potential risks at a 99.5% confidence level. Similarly, Japan introduced and implemented a fair value-based economic solvency ratio, ECR regime, broadly similar to KICS and Solvency II. By contrast, in the United States and China, some elements of cost-based valuation still remain.
Robert Chaplin (15:56):
Thanks, Chiara. That’s a really comprehensive overview. Korea’s prudential solvency regime is clearly sophisticated and evolving rapidly. Thanks for joining me today to discuss the Korean insurance regulatory landscape. We’re nearly there now on our Encyclopaedia of Prudential Solvency, and we’ve only got a few episodes left, so we’re going to get those out very, very soon. And then we have a new, exciting series. I’m not going to say what the name is today. I don’t want to spoil the reveal for when that comes, but we’ve all got that mapped out for the year ahead of us, and we’ll be starting that very soon. So, thanks to our listeners today. Please stay tuned and join us for the next episode. Bye for now.
Voiceover (16:38):
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