Joint Underwriting of Risks from the Residual Fire Insurance Market in Korea

Changes in Joint Underwriting of Fire Insurance

The Financial Services Commission (FSC) has approved the revision of the joint underwriting agreement on special building fire insurance in September 2023, as requested by the Korean Fire Protection Association (KFPA). The change is aimed at expanding the eligibility for joint underwriting of special building fire insurance and increasing the scope of coverage beyond fire damage.

The joint underwriting agreement between the KFPA and non-life insurers, which was initially approved by the FSC in 2021, allows them to collectively underwrite high-risk businesses to provide insurance to those who have difficulty obtaining coverage from the standard market. The objective of joint underwriting is to make sure that fire coverage is available when insurance applications for special buildings are rejected due to factors such as a history of fire incidents even though it is mandatory for special building owners to have fire insurance covers.

Under the revised agreement, apartment complexes with 15 floors or less and other multi-family residential buildings are eligible for fire insurance coverage available through joint underwriting in the same way as special buildings are covered. Currently, they are not classified as special buildings by law.

The revision has also broadened the scope of coverage to cover losses beyond those caused by fire, including damage resulting from natural disasters, building collapse, and leaks from water supply or drainage systems, as desired by the policyholder.

Compulsory Fire Insurance Requirement in Korea  

In Korea, the compulsory fire insurance requirement is imposed on property owners with regard to specified types of buildings, defined as special buildings, which are at risk of large fire losses such as third party death, bodily injury, and property damage caused by fire. Owners of special buildings are required to buy necessary insurance coverage under the Act on the Indemnification for Fire-Caused Loss and the Purchase of Insurance Policies.

Under the compulsory fire insurance policy in Korea, the statutory third party liability limits are KRW 150 million per person for death and permanent disability, KRW 30 million for third party bodily injury, and KRW 1 billion per event for damage to third party property.

The types of properties defined as special buildings include the following:

-  Commercial buildings with 11 stories or more

- Apartment complexes with at least one building of 16 stories or more and others of 15 stories or less

- Buildings where areas above 2,000 square meters are occupied by schools, department stores, restaurants, supermarkets, cinemas, subway stations etc.

- Railway stations, malls, markets, hospitals, educational establishments, factories, public venues, broadcasting stations, accommodation facilities and hotels above 3,000 square meters in floor area

- Government-owned buildings above 1,000 square meters in floor area

- Indoor shooting ranges

The scope of special buildings has been expanded to increase the fire insurance take-up rate and to ensure that social safety net is strengthened against the risk of fire events. Fire hazards present particularly significant risks to large commercial and residential buildings, endangering the safety of occupants, potentially causing property damage, and disrupting business operations.

However, there are some special buildings that are left uninsured due to difficulties in obtaining relevant insurance coverage because they are considered risky. For these high-risk special buildings, property owners would find it challenging and time-consuming to purchase fire insurance because they have to contact multiple insurance companies to figure out which insurers are willing to offer insurance coverage. Another challenge is that insurers try to avoid accepting some special buildings because they are considered to present extremely high risk. In particular, some chemical plants, waste recycling, and plastic manufacturing factories are declined by most insurers.

In response, the FSC took a set of measures to address those issues in 2021, including joint underwriting through the KFPA. The financial regulator also worked with the KFPA to create and operate a search system for fire insurance applications through which insurers can access applications that have been declined by other insurers. In other words, when a prospective insurance buyer submits an application to a single insurer and that insurer declines to accept the application, other insurers may access the application information with the consent of the applicant and initiate their underwriting process to evaluate the risk. This makes it easier for insurance buyers to get the insurance coverage as required by law without the need to contact multiple insurers. Any applications that have not been accepted through the search system will be automatically placed to the joint underwriting group led by the KFPA.