Insurance Regulatory Changes in 2023
The year 2023 is going to be a transformative year for the Korean insurance industry given that major regulatory changes are taking effect and their implications could be significant across the insurance sector. Here is a rundown of the latest insurance regulatory changes:
Implementation of IFRS 17
The insurance industry implements the transition to International Financial Reporting Standard 17 (IFRS 17) starting January 1, 2023. The accounting transition to IFRS 17 represents the most sweeping change in decades to financial reporting for insurers. The new accounting standard is designed to achieve the goal of a consistent, principle-based accounting for insurance contracts, bringing fundamental changes to accounting, actuarial, and reporting practices in the insurance industry. It will be a globally uniform basis for the accounting of insurance contracts.
IFRS 17 requires insurers to measure their insurance liabilities at fair value and recognize their revenue on an accrual basis not on a cash basis, allowing revenue to reflect the services provided and exclude deposits. This method of revenue recognition is consistent with the recognition of revenue for most contracts with customers in other industries and for many short-term insurance contracts. As such, IFRS 17 will move insurers closer to other industries in terms of the comparability of financial statements.
In 2023, improvements will be made in insurance financial statements due to the implementation of IFRS 17, and more transparent and useful information will be provided in financial reporting of insurance companies. While the impact of changes will be notable for life insurers, the accounting transition will still be important for all insurers across the board.
However, no major disruption or confusion is unlikely in the wake of the official transition to IRFS 17 as insurers have been preparing to run business on IFRS 17 systems for many years now. Indeed, most insurance companies in Korea have already been trying to apply the new rules in parallel with their existing accounting that is based on IFRS 4. This is because prior year comparatives must also be reported under IFRS 17 in the 2023 financial statements. Insurers have made a lot of investments in making sure that their existing IT landscapes are adjusted to integrate new functions necessary to implement the new accounting requirements.
Implementation of K-ICS
The Korean Insurance Capital Standard (K-ICS), a full-fledged risk-based capital system, comes into force on January 1, 2023 in step with the implementation of IFRS 17. This new capital regime requires insurance companies to measure their assets and liabilities at market value and use a full fair-value balance sheet to calculate the amount of required capital, which is consistent with global best practices and standards. It allows risk measurement to be more precise using shock scenarios, and the required capital of an insurer is defined as the value-at-risk (VAR) of the own funds of the insurer subject to a confidence level of 99.5%.
The required capital is calculated for a new set of five risk categories: life/long-term insurance risk, general P&C insurance risk, market risk (including interest rate risk), credit risk and operational risk. A major change in risk categories is the division of insurance risk into life/long-term insurance risk and general P&C insurance risk, with four subcategories being created within insurance risk – longevity, surrender, expense and catastrophe. A new subcategory under market risk is asset concentration.
The focus of the new solvency regime is taking a substantive risk management approach towards capital requirements. Its primary goal is to ensure that insurers hold sufficient economic capital to protect the policyholders by helping to align their risk profile with economic conditions.
Insurers in Korea have been under pressure to increase their capital in the run-up to the implementation of K-ICS, with supervisory authorities guiding insurers to improve their capital strength in time for the new capital regime. Given the profitability of insurers was generally weak, it has been challenging for them either to boost capital from retained earnings, or to convince shareholders to contribute to rights issues. Under these circumstances, mid-sized or small insurers were left with few choices but to issue subordinated debt. Some insurers raised new capital from the issuance of hybrid capital securities to strengthen their capital position.
Although there were concerns initially that K-ICS would force the insolvency of some smaller insurers, financial regulators have been careful to tighten capital standards in stages so that all companies can keep up with regulatory demand and increase their solvency levels gradually.
Suspension of Medical Expense Insurance Coverage
There has been a change in the availability of medical expense coverage suspension since January 2023. The change is aimed at preventing individuals from having overlapping medical expense insurance coverage. For the insured individuals (employees) of a group medical expense insurance policy, who have their separate individual medical expense insurance, it has now become possible to have their group coverage suspended if the group policyholders (employers) agreed to attach a rider to the group policy to allow the temporary opt-out option. When the insured opt to suspend their individual medical expense coverage, they are allowed to restart the coverage whenever they want by choosing either the same policy they held previously or a new one available at the time of resumption.
About 1.33 million people in Korea had more than one medical expense insurance policy, and 95% of them were insured under both individual and group policies as of late March 2022. As medical expense insurance is an indemnity-based health insurance policy that pays a set portion of the actual medical treatment and hospitalization expenses, having more than one policy is not necessary. With the introduction of coverage suspension option, insurance consumers will be saved from unnecessary premium payments.
Relaxation of the Insurance Licensing Regulation
The insurance licensing regulation has been revised to relax the one company, one license policy to enable the insurance industry to better deal with digitalization and an evolving insurance market environment. Since the revision went into force in November 2022, more than one life or non-life insurance business license can now be held by each insurance group. Subsidiaries of existing insurers are allowed to engage in the insurance business as small-amount and short-term insurers or mono-line insurers specializing in the products that their parent companies do not handle. They are permitted to work with the same exclusive solicitors tied to their insurance group. In addition, insurers are allowed to use cyber marketing channels like mobile phones and websites even if there is an insurer within the insurance group that specializes in cyber marketing.
Changes in the Standard Terms and Conditions of a Car Insurance Policy
There have been changes in the standard terms and conditions of a car insurance policy, which became effective in January 2023. Patients with minor injuries from car accidents must pay for a portion of medical expenses in excess of Third Party Bodily Injury I Coverage depending on the degree of their own negligence. The payment can be made from their own insurance or out of their own pockets.
In addition, when patients with mild injuries receive long-term treatment for more than four weeks, they must submit a diagnostic report issued by the medical institution to the insurance company. Previously, it was possible for a car accident victim to receive medical treatment and get insurance coverage for an unlimited period of time without submitting a proof document like a diagnostic report, but now car insurance coverage for such long-term treatment is available only for a period specified in the medical report.
Another change is to expand the types of repair and include towing costs in losses covered by Third Party Property Damage Coverage so as to provide adequate protection to insurance consumers.
Increase in Reward for Reporting Insurance Fraud
The maximum reward for reporting insurance fraud has been raised from KRW 1 billion to KRW 2 billion since January 2023 in order to encourage the reporting of insurance fraud and curb fraudulent insurance claims. When an insurance claim is filed, a notification message is sent to the claimant regarding the reporting of insurance fraud. This will help raise public awareness of insurance scams.
False or inflated claims are a serious issue for the insurance industry. Insurance fraud is a crime committed against or by an insurance company or agent for profit. It is essential for the industry to work closely together with supervisory authorities to detect fraudulent claims arising from the dishonest intent of policyholders who expect to make financial gains from their insurance policies and the collusion of insurance professionals, agents, doctors, medical service providers, and car repair shops.