Korean
Insurance Market
- Home
- Korean Insurance Market
Insurance Regulatory Changes in 2024
Expanded Scope of Parties Subject to Compulsory Liability Insurance Requirement against Personal Information Leak
Pursuant to the Personal Information Protection Act that took effect in August 2020, information/communications service providers are mandated to purchase liability insurance to compensate for any damages resulting from a personal information leak. This compulsory insurance helps ensure companies' ability to compensate for the losses incurred by the victims, providing an effective remedy for any damage incurred. Initially, companies subject to this requirement were providers of information/communications services that store or manage personal information of 1,000 users or more on average per day during the three-month period immediately preceding the end of the previous year, with recorded sales revenue of KRW 50 million or more per year.
Starting from March 2024, however, the scope of businesses subject to the compulsory liability insurance requirement is expanded further to include personal information controllers (such as companies and hospitals) in addition to existing information/communications service providers (telecommunications businesses, online shopping malls, etc.). To fulfill their liabilities for compensating personal information leak losses, these companies must purchase insurance from insurers or cooperative associations (fraternal benefit societies) or set aside an appropriate provision.
(Source: Attached Table 1-4 of the Enforcement Decree of the Personal Information Protection Act)
Currently, the insurance take-up rate remains low because the government allowed the options of provisioning as well as buying insurance from insurers or cooperative associations. According to the Korea Insurance Research Institute, companies are more likely to opt for provisioning rather than insurance plans, unless more stringent monitoring measures are imposed by the government.
According to a media outlet report, the number of insurance policies taken out remains low, standing at 24,000 as of the end of 2021. This only accounts for approximately 13% of the 180,000 businesses subject to the compulsory insurance requirement. The reason behind this low take-up rate is that, despite the possible fines, there is no way for the government to verify whether companies have set aside reserves or purchased insurance.
Ultimately, the government's plan is to revise the criteria for the necessary sum insured and increase the penalty amount while actively promoting the initiative for compulsory insurance.
Virtual Asset Service Providers Mandated to Purchase Liability Insurance
Pursuant to the Act on the Protection of Virtual Asset Users taking effect in July 2024, virtual asset service providers must take necessary measures as per criteria set forth by the Financial Services Commission. They are required to buy liability insurance from insurers or cooperative associations, or set aside a provision to cover liabilities arising from hacking, system failures, or other accidents defined by the Presidential Degree of the Act.
To better prepare for accidents such as hacking, virtual asset service providers are required to store 80% or more of their users' virtual assets in offline cold wallets for security purposes. The insurance coverage limit or the provision amount should be at least 5% of customers' virtual assets stored in hot wallets.
Policy Support for Insurers' Overseas Expansion
Since a few non-life insurance companies and a reinsurance company in Korea set up their overseas operations in the 1970s, there are now four life insurance companies and seven non-life insurance companies operating in various jurisdictions. As of the end of 2022, these companies are present in the U.S. (13), China (3), Japan (2), Vietnam (5), Thailand (1), Indonesia (4), Singapore (3), Malaysia (1), UAE (3), UK (3), and Switzerland (1). A total of 39 global offices have been set up in 11 countries for their overseas operations, with 30 licensed for insurance business, 9 licensed for non-insurance business (excluding representative offices).
(Source: Financial Supervisory Service)
Due to limited opportunities for growth and business within the domestic market, many Korean insurers are seeking to set up a presence in global markets as part of their efforts to find a new growth engine. However, their business scale remains small, and insurers must secure a stable stream of income and other sources of revenue from non-insurance business.
To secure new drivers of growth, insurers must be backed by policy support, which helps them make inroads into overseas markets. To this end, the financial regulator announced its commitment on July 17, 2023 to support financial institutions' overseas expansion by easing regulatory hurdles for the overseas presence and business expansion of Korean financial companies including insurers.
As part of such policy support, a revision has been made to the regulation for overseas expansion of financial companies in order to allow representative offices to conduct business activities within the limits permitted by local laws of the countries where the offices are operating. This aims to enable domestic financial firms to benefit from the advantages of local systems on an equal footing with overseas financial companies.
Previously, the regulation differentiates between branches capable of holding operational funds and conducting business activities to handle transactions and representative offices designated for non-business activities such as market research and communication. Some countries, however, do not keep foreign representative offices from engaging in business activities. For example, in Colombia, there are no regulations regarding the establishment of branches for foreign reinsurance companies. Instead, certain business activities are allowed for offices acting on behalf of the headquarters.
Another noteworthy deregulation is to simplify the approval process for insurers who intend to acquire overseas subsidiaries. In principle, an insurer must obtain approval from the Financial Services Commission when acquiring an overseas subsidiary, while the regulator previously allowed insurers to give prior notice in lieu of approval for any operation that was closely related to the insurance business. The regulator has now further expanded the scope of subsidiary businesses subject to prior notice to include healthcare, consultations related to insurance contracts or loans, and operation of welfare facilities for senior citizens.
Sliding Scale Premiums for 4th Generation Medical Expense Insurance
Medical expense insurance in Korea has progressed into its fourth generation, evolving from the first to the third generation policies. To resolve the issue of inequity in premium payments by policyholders, rider premiums will be applicable on a sliding scale from July 2024 for non-benefit items based on the past record of medical service usage (the amount of insurance claims payment for non-benefit expenses for the past year). However, illnesses subject to differential co-payment (cancer, heart diseases, cerebrovascular diseases, rare intractable diseases, etc.) and medical expenses incurred by Class 1 to Class 2 long-term cares will be exempt from the calculation of insurance claims payment for non-benefit expenses.
(Sources: Korea Life Insurance Association, General Insurance Association of Korea, Dec 28, 2023)
More Tax Benefits for Pension Deposited to Individual Retirement Pensions and Individual Pension Savings Accounts
The base amount for separate taxation at a lower rate (3 to 5%) in the event of enrollment to pension accounts (individual retirement pensions or individual pension savings) has been raised from KRW 12 million to KRW 15 million, giving greater tax benefits for individual pensioners.
(Sources: Korea Life Insurance Association, General Insurance Association of Korea, Dec 28, 2023)
Digitalization of the Insurance Business to Enhance Consumer Convenience
In the past, consumers had to go through the cumbersome process of submitting 28 types of administrative documents to the insurer in relation to their insurance contracts. Going forward, government agencies that retain the data will have the ability to send the data directly to the insurer upon consent from the data subject.
Moreover, platforms will be available that allow consumers to compare and recommend insurance products from different insurers and purchase a policy online. The services will be launched in phases based on the product type. The products in scope include car insurance, savings insurance (excluding annuities), credit insurance, medical expense insurance, overseas travel insurance, pet insurance, and short-term insurance.
Review of 2023 Natural Catastrophes in Korea
Typhoons and heavy rainfalls are the biggest natural perils in Korea. The majority of extreme precipitation events are concentrated during the summer monsoon season in July and August, with property losses typically occurring in July.
(Source: Disaster Annual Report from the Ministry of the Interior and Safety)
Due to the influence of climate change on heavy downpours, we persistently witnessed heavy rainfalls in 2023 and 2022. The number of rainy days in July was 17.7 days. This was higher than the average precipitation for the past 30 years, which was 14.8 days. The precipitation in July stood at 506.4mm, which was much more than the average precipitation for the past 30 years (245.9 to 308.2mm). This was the second heaviest recorded rainfall since the records began. The precipitation for the summer of 2023 was the fifth highest since 1973.
In 2023, the rainy season brought a total accumulated precipitation of 641.4mm. This was the third highest on record after 704mm in 2006 and 701.4mm in 2020. Heavy rainfall flooded 2,284 homes and 2,069 small businesses. The downpours also damaged 7,470 public facilities including roads and bridges. Korea’s hardest hit provinces were Chungcheong and North Gyeongsang.
The average number of typhoons per year over the past 30 years is 25.1 and 26.1 over the past 10 years. The average number of typhoons passing through the Korean peninsula was 3.4 during the 30 years and 4.0 during the 10 years. Among the 17 typhoons that occurred in 2023, the year's sixth typhoon, Khanun, was the one that made landfall in the Korean peninsula.
*Figures in ( ) refer to the number of typhoons that affected the Korean peninsula. (Source: Korea Meteorological Administration)
Typhoon Khanun was equivalent to Category 4 status on the Saffir-Simpson scale, with a central atmospheric pressure of 930 hPa. By the time it reached the central inland of the Korean peninsula, it sustained a central pressure of 980hPa. As the typhoon rampaged from south to north, some parts of the Korean peninsula recorded 91.3mm of rain per hour, solidifying its ranking as the seventh wettest typhoon in history. The precipitation per day was 362mm, marking the tenth heaviest rainfall since records began.
The heavy rainfall during the summer claimed the lives of 47 people and caused property damage worth KRW 751.3 billion. Typhoon Khanun alone cost 2 lives and KRW 55.8 billion in property damage. The government invested KRW 1.8 trillion for recovery efforts, calculated by multiplying 2.2 by the loss amount. This budget was not only used for rebuilding public facilities, but also for preventing future losses that may be caused by natural disasters.
According to the statistics, the cost of damage caused by natural disasters usually amounts to KRW 2 trillion or less. However, this amount was surpassed in 1987, 1998, 2002, 2003, and 2006.
*Losses caused by natural disasters were converted based on the value of KRW in 2022.
(Source: Disaster Annual Report 2022 from the Ministry of the Interior and Safety published in December 2023)
Analysis on Large Insured Losses for Casualty Insurance (Liability) for the Past 10 Years
There were 189 large insured losses in amount of KRW 1 billion or more for general liability insurance or financial and professional (Fin Pro) liability insurance during the past 10 years (January 2014 to September 2023) in Korea. The total amount of the losses per year averaged KRW 76.8 billion (as of the date of the loss), and the average number of claims per year was 18.9. The average loss amount per claim was approximately KRW 4.1 billion. These figures are based on the contracts written by Korean Re.
In 2020, there were a total of 22 claims, with the total loss amount of KRW 242 billion, taking account of 31.5% of the total insured losses for the 10 years. The loss amount per claim for the year was KRW 11 billion. Excluding 2020, there were a total of 167 claims during the 9 years with an average annual aggregate loss of KRW 58.5 billion. This is translated into an annual average of 19 claims, with the loss amount of KRW 3.15 billion per claim. Top 5 large insured losses in 2020 were a recall loss in the amount of KRW 67.6 billion, a recall loss in the amount of KRW 45.4 billion, a property all risk insurance loss (Section IV) in the amount of KRW 37 billion, a commercial general liability (CGL) loss in the amount of KRW 25.7 billion, and a recall loss in the amount of KRW 20.9 billion. The total loss amount for 5 claims amounted to KRW 196.6 billion, which is 81.2% of the total loss amount.
In the general liability insurance business, the number of accidents was 50 for CGL and 49 for product liability, both of which account for 52% of the total accidents. On the other hand, the loss amount was KRW 170 billion for CGL, KRW 161.7 billion for product liability, and KRW 154.2 billion for product recall, all of which account for 82% of the total loss amount. The average loss amount per accident for product recall was high and stood at KRW 25.7 billion. The loss amount per accident excluding product recall was approximately KRW 2.5 billion.
In the Fin Pro liability insurance business, the number of accidents was 17 for Directors and Officers (D&O) and 9 for Bankers Blanket Bond (BBB), both of which account for 55.3% of the total number of accidents. The loss amount was KRW 74.8 billion for D&O and KRW 44.4 billion for Financial Institution (FI) Package Insurance, both of which account for 67.8% of the total loss amount. The average loss amount per accident was KRW 15.1 billion for Computer Consultant Professional Liability Insurance and KRW 11.1 billion for FI Package, both of which are on a higher scale than others. Excluding these two lines of business, the average loss amount per claim is approximately KRW 2.8 billion.
The aggregate amount of the top 10 highest insured losses for casualty insurance stood at KRW 302.5 billion, which accounts for 39.4% of the total losses. General liability resulted in 8 claims in the amount of KRW 262.5 billion whereas Fin Pro liability resulted in 2 claims in the amount of KRW 40 billion. General liability had a much greater share of large liability claims.
Review of the Pet Insurance Market in Korea
As of the end of 2022, the number of households with pets totaled 5.52 million, which accounts for 25.7% of the total number of households. The number of people with pets is projected to be 12.62 million. Dogs and cats take the lion's share, with dogs taking up 71.4% (4.73 million) of the total and cats accounting for 27.1% (2.39 million). Among pet owners, the average number of pets per household is 1.2 for dogs and 1.5 for cats, according to KB Financial Holding Business Management Research Institute.
A survey conducted on 1,000 respondents by KB Financial Holding Business Management Research Institute showed that the average monthly spending on pet care stood at KRW 154,000. Spending on food (31.7%) and treats (19.1%) made up half (50.8%) of the total. Over 73% of the households with pets spent on veterinary care, and the cost for veterinary care increased drastically during the past 2 years from KRW 468,000 in 2021 (KRW 20,000 per month) to KRW 788,000 in 2023 (KRW 33,000 per month). Costs for examination (39.6%) and treatment for skin disease (23.6%) were among the highest.
According to the survey, 89% of the households with pets were aware of pet insurance, but only 11.9% of the households with pets actually purchased pet insurance. The perception level and the insurance take-up rate rose significantly compared to the past. The average amount of premium per month was KRW 69,000, and two-thirds of the respondents answered that they received compensation through pet insurance claims.
Almost 27% of the households with pets said that they needed pet insurance. However, many responded that pet insurance leaves a lot to be desired. Most cited low coverage levels (high deductibles), limited scope of coverage, and high premiums as areas where improvements are needed.
The survey was conducted on 119 pet insurance policyholders.
The survey was conducted on 881 potential pet insurance policyholders.
As part of efforts to invigorate the market for pet insurance, proposals were made for a standardized fee-for-service scheme for treatments (43.9%), a regular renewal scheme for registering pet information (14.3%), prior notification of medical service fees (12.3%), and imposing the pet liability insurance requirement (12.2%).
With the growing number of households with pets, there is more demand for pet insurance. Most of non-life insurers are launching and selling pet insurance. Yet, as of 2022, the pet insurance take-up rate stands at 0.9%, which is low when compared with other developed countries (Sweden 40%, UK 25%, Norway 14%, France 5%, Japan 12.5%, and US 2.5%).
To address this gap, the Korean government has prepared plans to vitalize the pet insurance market, which includes the establishment of an insurance infrastructure related to animal medical care, improvement of consumer convenience, development of customized products for pet insurance, and allowing the entry of insurance companies specializing in specific lines of business such as pet insurance.
Building an infrastructure for pet insurance requires a more simplified claim filing process and a better pet identification system which allows a pet owner to submit a pet insurance application using the pet's biometric information. The standardization of medical service items is also an important element of the pet insurance infrastructure. In addition, it is necessary to mandate veterinary clinics to publicly disclose key medical fees for treatment with high frequency. Consumers should also be able to obtain documents evidencing medical records and medical fees from veterinary clinics in order to submit their pet insurance claims.
To improve consumer convenience, the government is planning to allow veterinary clinics and pet shops to register pets or sell pet insurance products, with insurance claims being processed via electronic system at veterinary clinics.
Product development is also crucial to market growth. As of 2023, 11 non-life insurers are selling pet insurance, but their products have a limited scope of coverage. Going forward, the government will support the development of differentiated products and services with a varied scope of coverage and policy limits.
Lastly, the applicable regulation will be revised to allow entry of insurance companies specializing in pets.
The government will make it easier to set up mono-line insurers that are focused on providing only one specific line of business such as pet insurance.
The pet insurance market has grown rapidly in Korea, with pet premium income increasing by almost 40 times from KRW 1.1 billion in 2018 to KRW 44.3 billion in 2023. The number of in-force policies during the same period also grew by 16 times from approximately 7,000 to 11,000 policies.
(Sources: KB Financial Holding Business Management Research Institute, Maeil Business News Korea, Dec 24, 2023)
The future growth of the pet insurance market will be dependent on the efforts of the insurers, particularly in alignment with government-led initiatives to promote pet insurance. Currently, pet insurance is offered on the basis of tariff rates provided by the Korea Insurance Development Institute (KIDI) and rates that are based on an insurer's own experience. The availability of reliable data is essential for market growth and product development. Until sufficient statistical data is accumulated within the industry, it may be helpful to use rates and coverage conditions offered by reinsurers and take advantage of their capacity.
RBC Ratios of the Korean Insurance Industry as of September 2023
The solvency of the Korean insurance industry improved at the end of the third quarter of 2023 compared to the preceding three months. After the implementation of transitional measures under the new regime of the Korean-Insurance Capital Standards (K-ICS), the average K-ICS ratio of insurers increased by 0.6%p to 224.2%, according to the data released by the Financial Supervisory Service (FSS). The K-ICS ratio of life insurers rose by 0.2%p quarter-on-quarter to 224.5%, while non-life insurers saw their ratio increase by 1.1%p to 223.8% over the same period.
As of late September 2023, 19 insurers (12 life insurers and 7 non-life (re)insurers) applied transitional measures, effectively preventing a significant decline in the K-ICS ratio of insurers. The regulator allowed insurers to take transitional measures after prior approval, recognizing that some insurers may need more time to improve their capital strength or adapt to the new requirements before having to fully comply with K-ICS. These measures aim to smooth out the financial impacts of the K-ICS implementation over time.
*The 2023 ratios refer to K-ICS ratios after the application of transitional measures. (Source: Financial Supervisory Service, Press Release on Jan 16, 2024)
The main reason for the changes in the K-ICS ratio in the third quarter of 2023 is the increased amount of available capital. After the implementation of the transitional measure as of the end of September 2023, the amount of available capital increased by KRW 2.2 trillion to KRW 261.7 trillion quarter-on-quarter. This is due to a higher 10-year treasury yield (3.68% as of June-end 2023 compared to 4.03% as of September-end 2023) that lowered the value of insurance liabilities and increased the accumulated other comprehensive income by KRW 1.8 trillion. The increase in available capital was also driven by a rise of KRW 1.1 trillion in adjustment reserves, resulting from inflows of new contracts.
After the implementation of the transitional measure, the amount of the required capital increased by KRW 0.7 trillion to KRW 116.7 trillion quarter-on-quarter. Although there was less exposure (by KRW 0.9 trillion) to market risk such as stock price volatility and exchange rate fluctuation, lapse risk increased further (by KRW 3.6 trillion), resulting in an additional KRW 2.2 trillion of life insurance risk and long-term non-life insurance risk.
(Source: Financial Supervisory Service, Insurance Companies' Capital Adequacy Ratios under K-ICS, September 2023, Press Release dated Jan 16, 2024)
The capital strength of Korean insurers bottomed out in the second half of 2022 and is on an upward trend. Insurers have been taking various measures such as entering into coinsurance deals with reinsurers to ease their capital requirements or increasing available capital to bolster their RBC ratios.
After transitional measures, the K-ICS ratio of the insurance industry stood at 224.2% in late September 2023, which is at a stable level. However, sustained volatility in the financial market is being witnessed, such as fluctuations in interest rates and currency rates. The regulator is going to strengthen supervision over their capital strength in order to ensure sufficient capital buffers.
The Financial Supervisory Service (FSS) has improved technical reserving and K-ICS related requirements from January 2024 to enable comparison among insurers and ensure financial soundness.
It should be noted that IFRS 17 standards do not provide any concrete guidelines for calculating the Loss Development Factor (LDF). This is why insurers are using various methods to estimate loss development. To calculate the LDF, insurers have arbitrarily chosen between the date when an accident occurs and the date when the reason for payment arises. Starting from January 2024, however, the regulation has been revised to apply the date of the insurance payment obligation in principle. If the justification is substantiated, the date of the accident may be applicable to calculate the estimated loss development. For any additional insurance payment due to the same accident, the terms and conditions of the policy will be considered, and the initial date of the accident will be applied to calculate the LDF.
The criteria for calculating the discount rate for insurance liability have improved. The range of the Long-term Forward Rates (LTFR) adjustment applicable to long-term liabilities (60 years or more) without any market information has been increased from 15 bps to 25 bps. The greater range was allowed so that the long-term discount rate can be more in line with the actual interest rate.
The regulator also introduced the proportionality principle to evaluate assets and liabilities. Previously, the basic method was universally applied even to assets and liabilities that would have little impact on the actual K-ICS ratio. This was time and resource consuming because the basic method for evaluating assets and liabilities was extremely complicated. To simplify the calculation, the regulator allowed a conservative approach (based on an assumption of 50% loss) to be applied to drastically save time and resources.
Lastly, the levels of shocks caused by large-scale surrenders have been differentiated based on the product attributes. When there is an economic fluctuation, the insured tend to surrender their savings products first. This is why in the event of an economic crisis, the likelihood of savings insurance being surrendered at a large scale is higher than protection insurance. Until now, the same level of shock (30%) has been applied across the board despite the difference. This percentage was amended so that 35% can be applied for savings insurance and 25% can be applied for protection insurance.