Insurance and reinsurance in South Korea: overview

A Q&A guide to insurance and reinsurance law in South Korea.

The Q&A gives a high level overview of the market trends and regulatory framework in the insurance and reinsurance market; the definitions for a contract of insurance and a contract of reinsurance; the regulation of insurance and reinsurance contracts; the forms of corporate organisation an insurer can take; and the regulation of insurers and reinsurers, including regulation of the transfer of risk. It also covers: operating restrictions for insurance and reinsurance entities; reinsurance monitoring and disclosure requirements; content requirements for policies and implied terms; insurance and reinsurance claims; remedies; insolvency of insurance and reinsurance providers; taxation; dispute resolution; and proposals for reform. Finally, it provides websites and brief details for the main insurance/reinsurance trade organisations in South Korea.

To compare answers across multiple jurisdictions visit the Insurance and Reinsurance Country Q&A tool.

This Q&A is part of the global guide to insurance and reinsurance. For a full list of jurisdictional Q&As visit www.practicallaw.com/insurance-guide.

Contents

Market trends and regulatory framework

1. What were the main trends in the insurance and reinsurance markets over the last 12 months?

Insurance

In 2015, the market for retirement pension insurance products grew substantially. There is a growing interest in retirement pension insurance products as people are more interested in having an income during retirement and the government continues to provide institutional support for private pension schemes. In October 2015, the Financial Services Commission (FSC) released a Road Map for Enhancement of Competitiveness in the Insurance Industry (Road Map) to enhance autonomy in product development. Under the Road Map, the current prior reporting system will, in principle, be changed to an ex post facto reporting system and certain restrictions such as standard terms and conditions and excessive product standards will be eased or abolished.

South Korean insurance companies began to sell new types of insurance products as below:

  • Whole life insurance products under which the death benefit which would have been paid after the insured's death is pre-paid before the death so that the payment could be used to meet various needs after retirement such as living expenses.

  • Whole life insurance products under which the surrender values would be lower than those of existing insurance products if the policies are terminated during the coverage period, but insurance benefits for policy holders who maintain the policies until the end of the coverage period would be larger than those of existing insurance products.

From September 2015, deductibles for health insurance (covering actual medical expenses) were increased to constitute 20% of the medical expenses actually incurred, which led to reduced premiums for such health insurance.

Single insurance agents (selling a single specialised line of insurance products related to their own original businesses, for example, real estate brokers selling title insurance only) were introduced for the first time and they started selling a new product, which is extended warranty insurance.

A price comparison website for insurance products has launched. Although there are complaints that only limited types of insurance products (for example, insurance products with a simple structure, certain insurance products sold through a telemarketing or bancassurance channel) are available for price comparison, the website enables customers to compare prices of similar insurance products of insurance companies and is expected to have the positive effect of reducing premiums.

Reinsurance

With the occurrence of big accidents in 2015 (such as a fire at a Cheil Industries warehouse in Gimpo, South Korea and the explosions in Tianjin, China), losses of reinsurers soared.

Premiums for non-life insurance products for corporate policy holders have generally been calculated by reference to the rate provided by reinsurers, assuming that insurers will enter into reinsurance contracts with such reinsurers. However, according to the Road Map, insurers are now allowed to calculate premium amounts using other rates at their discretion.

The South Korean reinsurance market is getting more competitive with new foreign players. For example, Pacific Life Re has obtained the final approval to open a branch office in South Korea whereas Asia Capital Reinsurance Group has obtained the preliminary approval for its South Korean branch.

 
2. What is the regulatory framework for insurance/reinsurance activities?

Regulatory framework

Laws applicable to insurance and reinsurance activities. The Insurance Business Law (IBL), together with its regulations, sets out the statutory framework for the regulation of the insurance and reinsurance industries and aims to promote the sound operation of insurers and reinsurers, and to protect policyholders.

The Korean Commercial Code (KCC) provides for the general law on insurance contracts. The KCC sets out provisions relating to the following in relation to an insurance contract:

  • Establishment.

  • Effectiveness.

  • Resumption.

  • Nullification.

  • Amendment.

  • Termination.

Other insurance-related laws include the:

  • Act on the Establishment of Financial Services Commission (for supervision of insurance business).

  • Standardised Contracts Regulation Act (SCRA).

Corporate governance requirements. The IBL sets out certain qualification requirements for officers of insurers. For example, a person cannot become an officer of an insurer if he has been sentenced to a fine or a heavier criminal penalty under the IBL (or an equivalent foreign law) and less than five years has passed since the sentence was executed or discharged.

If an insurer has total assets of KRW2 trillion or more, the insurer must have three or more outside directors on its board, and at least half of the members on the board must be outside directors. Certain persons are disqualified from becoming outside directors, including a person (Article 15, IBL):

  • Specially related to the largest shareholder.

  • Who is, or has been, a standing officer or employee of the insurer concerned or any of its affiliates during the past two years.

An insurer with total assets of KRW2 trillion or more must establish an audit committee. The audit committee must have at least three directors, two-thirds of whom must be outside directors. An insurer must also appoint at least one person as a compliance officer, who is responsible for:

  • Monitoring compliance with internal control standards.

  • Investigating any violations of internal control standards.

  • Reporting the findings of his investigations to the statutory auditor or the audit committee.

The Act on the Corporate Governance of Financial Companies (Corporate Governance Act) will take effect in August 2016. The Corporate Governance Act will broadly apply to financial institutions including banks, financial investment companies, insurance companies, mutual savings banks, retail financing companies and financial holding companies.

The following is a summary of the key points of the Corporate Governance Act:

  • Insurance companies with total assets of KRW2 trillion or more will be required to have three or more outside directors, and the number of outside directors must be a majority of the total number of directors. Insurance companies with total assets of less than KRW2 trillion but more than (and including) KRW100 billion will be required to have outside directors that number 25% or more of the total number of directors.

  • The disqualification criteria for outside directors will be expanded, for example, any person who was a standing officer or employee or non-standing director of an insurance company or its affiliates in the most recent three years cannot become an outside director of the insurance company.

  • Insurance companies with total assets of KRW2 trillion or more will be required to have an audit committee. The audit committee will be comprised of at least three directors, and the number of outside directors in the audit committee will be at least two-thirds of the total number of members. At least one member of the audit committee must be an accounting or finance specialist.

  • In addition, the qualification requirements for outside directors will apply mutatis mutandis to the audit committee member who is not an outside director, one or more outside director(s) who will serve as audit committee member(s) will be appointed separately from other directors, and if the total number of shares held by the largest shareholder and certain other shareholders upon appointment or dismissal of an audit committee member exceeds 3% of the total number of shares issued, the shareholder may not exercise voting rights in excess of the threshold.

Capital requirement. To secure an insurer's ability to pay insurance claims and assure the soundness of its management, an insurer must have a risk-based capital (RBC) adequacy ratio of not less than 100%. The current practical guidelines by regulators are that the RBC should be at least 150%. The RBC system requires insurers to hold adequate capital to cover their exposures to:

  • Interest rate risk.

  • Market risk.

  • Credit risk.

  • Operational risk.

  • Insurance risk.

These risks are reflected in the calculation of risk-weighted assets.

Product filing. Insurers must obtain approval from the Financial Supervisory Service (FSS) before selling insurance products in the following circumstances:

  • If new legislation or amendment to the existing laws either:

    • allows for the sale of a new type of insurance product;

    • requires mandatory subscription to a certain insurance product.

  • If an insurer solicits prospective customers through a bancassurance channel.

  • If prior regulatory approval is required under the Enforcement Decree of the IBL for the purposes of policyholder protection or other reasons.

Reporting requirements. An insurer bears the following reporting obligations:

  • To close its books on 31 December every year and submit its financial statements and business reports to the FSS by 31 March the following year.

  • To submit to the FSS on a monthly basis a report stating the details of its businesses. The monthly reports must include, among other things:

    • information on the general status of the company;

    • financial statements;

    • status of premium income;

    • asset management details.

  • To regularly disclose major management issues on its website.

  • To file a report with the FSS if any major change relating to its business takes place, such as the appointment or removal of an officer or an increase in capital.

Regulations on large shareholders of an insurer. A large shareholder of an insurer cannot engage in certain acts that may conflict with the interest of the insurer. For example, requesting the insurer to provide non-public information in order to exercise undue influence is prohibited.

For restrictions on ownership or control for large shareholders, see Question 11.

Regulatory bodies

The government agencies that regulate the insurance industry in South Korea are the:

  • Financial Services Commission (FSC).

  • FSS.

The FSC's responsibilities generally include:

  • Establishing financial policies.

  • Enacting and amending insurance-related regulations.

  • Granting insurance business licences.

The FSS is the executive arm of the FSC. It conducts day-to-day supervision and audit of the insurance and reinsurance businesses.

 

Regulation of insurance and reinsurance contracts

3. What is a contract of insurance for the purposes of the law and regulation? How does it differ from a contract of reinsurance?

An insurance product is defined as a contract that stipulates the payment of money and other benefits to the insured on the occurrence of a contingency, for the purpose of guaranteeing risk and in exchange for consideration.

Reinsurance is treated as a category of non-life insurance and is defined as a contract through which an insurer transfers to another insurer all or part of the liabilities it bears under an insurance contract it has underwritten.

 
4. Are all contracts of insurance/reinsurance regulated?

All contracts of insurance or reinsurance are regulated. The primary law regulating insurance or reinsurance contracts is the Insurance Business Law. Certain insurance products are regulated by special laws.

 

Corporate structure

5. What form of corporate organisation can insurers take?

An insurer can take the form of:

  • A joint stock company.

  • A mutual company.

  • A branch of an offshore insurer.

All insurers currently operating in South Korea are either joint stock companies or branches of offshore insurers.

 

Regulation of insurers and reinsurers

6. Are all insurers and reinsurers regulated? Are they all regulated in the same way?

All insurers and reinsurers are regulated. Reinsurance is treated as a category of non-life insurance. Therefore, all of the laws and regulations that apply to non-life insurers apply to reinsurers as well.

 
7. Can insurers and reinsurers carry on non-insurance business? Are there any restrictions on their business activities?

An insurer can carry on certain non-insurance business to the extent that conducting this business does not undermine the:

  • Soundness of its business.

  • Protection of its policyholders.

  • Stability of the financial market.

In these cases, an insurer is required to report to the Financial Supervisory Commission at least seven days before the commencement of the contemplated business.

Insurers cannot concurrently carry on life insurance and non-life insurance businesses, subject to certain exceptions. Examples of exceptions include:

  • Life insurers can sell reinsurance of life insurance.

  • Non-life insurers can sell the third-area insurance.

 
8. Are there any statutory limits or other restrictions on, or requirements relating to, the transfer of risk by insurance or reinsurance companies?

There is no statutory limit on the amount of risk that can be reinsured.

However, a primary insurer is not required to retain liability reserves for the risk ceded to a reinsurer if all of the following conditions are met:

  • The reinsurance transaction must involve the transfer of insurance risk. The Insurance Business Law and its regulations do not define the meaning of "insurance risk", but the regulators generally apply a rather narrow interpretation (for example, by only recognising mortality risk or morbidity risk for the purpose of this requirement).

  • There should be an actual risk of loss for the reinsurer.

  • The reinsurer must satisfy the financial soundness standards in its home jurisdiction and a credit rating obtained from a reputable international rating firm within the recent three years should be investment grade or higher.

If an insurer cedes more than 50% of its entire risk to a reinsurer, the amount of risk ceded in excess of 50% will not be counted for the purpose of calculating the ceding company's risk-based capital ratio.

 

Operating restrictions

Authorisation or licensing

9. Does the entity or person have to be authorised or licensed?

Insurance/reinsurance providers

Insurers and reinsurers must obtain insurance business licences from the Financial Services Commission (FSC). A person that intends to obtain a licence for the insurance business must meet the following requirements:

  • The minimum capital requirement for an insurer with a comprehensive insurance business licence is KRW30 billion.

  • It must be capable of protecting policyholders and be fully equipped with physical facilities, including experts and computer facilities that are necessary for carrying on the insurance business. The FSC issued the Regulations on Outsourcing of Information Processing and IT Facilities of Financial Companies on 25 June 2013. According to this regulation and subsequent guidelines, IT facilities for back-office functions (for example, human resources) can be outsourced offshore subject to FSC approval. The IT facilities that process business directly related to the financial services to customers, such as insurance sales information systems, integrated claim processing systems and call centre systems cannot be outsourced offshore.

  • The business plan must be feasible and sound.

  • Large shareholders must have sufficient investment capabilities and sound financial standing with no history of disturbing sound economic order.

Insurance/reinsurance intermediaries

If an individual or entity wishes to solicit or market insurance or reinsurance products, it must register as one of the following:

  • An insurance solicitor that must meet certain registration requirements, such as the completion of training sessions held by an appropriate insurance association, before registering himself with the insurance association.

  • An insurance agent that must meet certain registration requirements, such as the completion of training sessions held by the Korea Insurance Institute, before registering himself with the Financial Supervisory Service (FSS).

  • An insurance broker that must pass an insurance broker's examination and register himself with the FSS.

Other providers of insurance/reinsurance-related activities

For other providers of insurance or reinsurance-related activities, insurance actuaries and damage adjusters must be registered with the FSS after passing an examination administered by the FSS.

 
10. What are the main exemptions or exclusions from authorisation or licensing?

Insurance/reinsurance providers

An offshore insurer not admitted in South Korea can provide residents with certain types of insurance that have been reserved for cross-border transactions under the Insurance Business Law (IBL) provided that the overseas insurer enters into a contract with a resident directly without using any agent, broker or a local insurer. However, as an exception, an overseas reinsurer can sell reinsurance products to a resident through a local broker. The types of insurance that have been reserved for cross-border transactions are:

  • Life insurance.

  • Export cargo insurance.

  • Import cargo insurance.

  • Aviation insurance.

  • Travel insurance.

  • Hull insurance.

  • Long-term casualty insurance.

  • Reinsurance.

The IBL also permits the cross-border sale of the following insurance products, regardless of the type of policy:

  • Insurance products that are not available in South Korea.

  • Insurance products that three or more local insurers have refused to underwrite even if such products are available in South Korea.

Insurance/reinsurance intermediaries

There are no exemptions or exclusions from authorisation or licensing applicable to insurance or reinsurance intermediaries.

Those that can be engaged in insurance solicitation include:

  • Insurance solicitors.

  • Insurance agencies.

  • Insurance brokers.

  • Officers and employees of an insurer (excluding the representative director, outside directors, statutory auditors and members of the audit committee).

Other providers of insurance/reinsurance-related activities

There are no exemptions or exclusions from authorisation or licensing applicable to damage adjusters or insurance actuaries.

Damage adjustment of an accident that occurred outside of South Korea does not require a certified damage adjuster.

 

Restrictions on ownership or control

11. Are there any restrictions on the ownership or control of insurance-related entities?

Insurance/reinsurance providers

A large shareholder of an insurer (that is, the largest shareholder or a holder of not less than 10% of the total issued and outstanding voting shares) must satisfy certain eligibility requirements and be approved by the Financial Services Commission (FSC).

Insurance/reinsurance intermediaries

Government agencies, financial holding companies and certain financial institutions cannot:

  • Hold more than 15% of total shares of the insurance agent or insurance broker.

  • Be the largest shareholder of an insurance agent or insurance broker.

Other providers of insurance/reinsurance-related activities

There is no restriction on the ownership or control of insurance actuaries or damage adjusters.

 
12. Must owners or controllers be approved by or notified to the relevant authorities before taking, increasing or reducing their control or ownership of the entity?

Insurance/reinsurance providers

If there is a change of more than 1% in the shareholding of a Financial Services Commission-approved large shareholder, the insurer must report such change to the Financial Supervisory Service (FSS).

Insurance/reinsurance intermediaries

There are no approval or notification requirements that apply to an insurance agent or insurance broker in connection with their control or ownership. For restrictions on ownership, see Question 11.

Other providers of insurance/reinsurance-related activities

There are no approval or notification requirements that apply to insurance actuaries or damage adjusters in connection with their control or ownership.

 

Ongoing requirements for the authorised or licensed entity

13. What are the key ongoing requirements with which the authorised or licensed entity must comply?

Insurance/reinsurance providers

After obtaining the licence for the insurance business, an insurer must continue to be capable of protecting policyholders and be fully equipped with the physical facilities necessary to carry on the contemplated insurance business.

An insurer is also subject to various requirements on:

  • Insurance products.

  • Solicitation on products.

  • Asset management.

  • Accounting and financial soundness.

  • Reporting.

For example, insurers can only borrow funds to:

  • Satisfy the financial soundness requirements under the Insurance Business Law (IBL).

  • Maintain an adequate level of liquidity that must only be through certain means.

Insurers must also file a report with the Financial Supervisory Service (FSS) before issuing subordinated debt and this subordinated debt must satisfy certain requirements such as the maturity period of five years or longer.

Under the IBL, insurers are subject to restrictions in engaging in certain transactions with their affiliates, including the following:

  • Insurers must obtain unanimous board approval prior to:

    • extending any credit to its affiliates of not less than KRW1 billion (or 0.1% of shareholders equity, whichever is less) for a single transaction;

    • acquiring bonds or stock issued by its affiliates of not less than KRW1 billion (or 0.1% of shareholders equity, whichever is less).

  • Insurers cannot engage in transactions with affiliates on terms that would be disadvantageous to the insurer.

Insurance/reinsurance intermediaries

The Financial Services Commission (FSC) can revoke the registration of an insurance solicitor in certain cases, for example, where the insurance solicitor is no longer qualified for the registration or the insurance solicitor is subject to business suspension under the IBL on at least two occasions.

The FSC can revoke the registration of an insurance agent and insurance broker in certain cases, for example, where the insurance agent or broker is:

  • No longer qualified for the registration.

  • Found to have violated certain provisions of IBL.

Other providers of insurance/reinsurance-related activities

The FSC can revoke the registration of an insurance actuary or claim adjuster in certain cases, for example, where the insurance actuary or claim adjuster is no longer qualified for the registration or the insurance actuary, or the claim adjuster is subject to business suspension under the IBL on at least two occasions.

 

Penalties for non-compliance with legal and regulatory requirements

14. What are the possible consequences of an entity failing to comply with applicable legal and regulatory requirements? What recourse do policyholders have if they have done business with a non-approved entity?

A violation of the Insurance Business Law can result in criminal penalties or administrative sanctions for insurance or reinsurance providers, intermediaries or other providers, for example:

  • Administrative fines.

  • Licence revocations.

  • Business suspensions.

 

Restrictions on persons to whom services can be marketed or sold

15. Are there any restrictions on the persons to whom insurance/reinsurance services and contracts can be marketed or sold?

A contract of insurance that designates the death of a person under the age of 15 or a mentally incompetent person as a risk insured against is null and void (Article 732, Korean Commercial Code (KCC)). However, if a mentally incompetent person executes an insurance contract or becomes insured under a group insurance contract, the insurance contract is deemed valid if he was mentally capable at the time of execution of such insurance contract. To execute an insurance contract with a minor that is under the age of 19, the consent from his legal representative is necessary (Article 5, Korean Civil Act).

 

Reinsurance monitoring and disclosure requirements

16. To what extent can/must a reinsurance company monitor the claims, settlements and underwriting of the cedant company?

There are no legal monitoring requirements.

 
17. What disclosure/notification obligations does the cedant company have to the reinsurance company?

An insurer must disclose material facts to a reinsurer when entering into a reinsurance contract. If there is a misstatement or omission of a material fact by the insurer, the reinsurer can terminate the contract.

 

Insurance and reinsurance policies

Content requirements and commonly found clauses

18. What are the main general form and content requirements for insurance policies? What are the most commonly found clauses?

Form and content requirements

Under the Insurance Business Supervisory Regulation, the following clauses must be included in insurance contracts:

  • Events that trigger the insurer's obligation to pay insurance benefits.

  • Events that render the insurance contract void.

  • Exemptions for the insurer's liability.

  • The scope and term of the insurer's obligations.

  • Losses suffered by the policyholder or the insured in the event of non-performance of their obligations.

  • Grounds for terminating all or part of the insurance contract and, if applicable, the rights and obligations of the parties.

  • The rights of the policyholder, the insured or the beneficiary to dividends or retained earnings.

  • Interest rates, performance calculation and disclosure methods, where the insurance benefits vary depending on the applicable interest rates or asset management performance.

  • Terms relating to deposit protection and protection of policyholders' rights.

  • Other terms that a policyholder should be aware of as a material part of the insurance contract.

Commonly found clauses

Clauses exempting an insurer from liabilities are commonly found in insurance contracts where a policyholder, the insured or a beneficiary intentionally causes a claim-triggering event or where a claim-triggering event is caused by:

  • War.

  • Acts of foreign enemies.

  • A revolution.

  • An insurrection.

  • A riot.

 
19. Is facultative or treaty reinsurance more common? What are the most commonly found clauses in reinsurance policies?

Facultative/treaty reinsurance

Treaty reinsurance is more common than facultative reinsurance. According to the statistics released by the Korean Reinsurance Company, which occupies about 60% of Korean reinsurance market, 21% of total reinsurance contracts in South Korea are facultative reinsurance and the rest of reinsurance contracts are treaty reinsurance.

Commonly found clauses

Reinsurance policies typically include the following clauses:

  • "Follow the fortune" clauses.

  • Claim control clauses.

  • Clauses on the reinsurer's right of inspection.

  • Clauses allowing insurance claims to be paid to the receiver or bankruptcy trustee on the insurer's insolvency.

  • Change of control clauses.

 

Implied terms

20. Are there any terms that are implied by law or regulation (even if not included in the insurance or reinsurance contract)?

Some terms are implied by law even if not included in insurance or reinsurance contracts. The Korean Commercial Code sets out certain implied terms, such as:

  • Where an insurer receives all or a portion of an insurance premium payment at the time of an insurance application, the insurer must notify the applicant of its underwriting decision within 30 days (unless agreed otherwise). If an insurer fails to provide a response within this period, the insurer is deemed to have accepted the insurance application.

  • Once a policyholder has entered into an insurance contract, the policyholder must pay the relevant insurance premiums (either the total insurance premiums payable or the first instalment) without delay. If a policyholder fails to pay these premiums and does not remedy the failure within two months from the date of the insurance contract, the contract is deemed to have been cancelled (unless agreed otherwise).

Under the Standardised Contracts Regulation Act, a standard form contract must:

  • Be construed impartially, in accordance with the principles of trust and good faith.

  • Not be construed differently for different customers.

  • Be construed in favour of the customer if the meaning of the contract is not clear.

 

Customer protections

21. How do customer protections in the general law affect insurance contracts? What customer protections are generally included in insurance policies to supplement this?

General law

Customer protections in Korean Commercial Code. When entering into an insurance contract, an insurer must deliver the standard insurance terms and conditions and explain important clauses to the policyholder. If the insurer fails to provide appropriate explanations, the policyholder can cancel the contract within three months of the execution date.

Customer protections in the Insurance Business Law. When executing or soliciting an insurance contract, an insurer is prohibited from, among others:

  • Making an untrue statement or an omission of an important matter to the policyholder or the insured.

  • Failing to provide a clear basis of comparison with other insurance products.

  • Marketing the superiority of the insurance product by comparing it with other insurance products without an objective ground.

Insurance policies

The standard terms and conditions of an insurance contract established by the Financial Supervisory Service (Standard Terms and Conditions) provide the following customer protections:

  • A policyholder can cancel the insurance contract within 15 days of his receipt of the insurance policy.

  • The policyholder can cancel the contract within three months of the contract date if the insurer:

    • fails to deliver to a policyholder the Standard Terms and Conditions or a copy of the application to be kept by the policyholder;

    • fails to explain important clauses of the Standard Terms and Conditions to the policyholder; or

    • fails to ensure that the insurance contract contains the signature of the policyholder.

  • An insurer must interpret:

    • the Standard Terms and Conditions in good faith and apply the same interpretation to all policyholders;

    • any uncertain terms in favour of the policyholder;

    • narrowly any clauses that place the policyholder at a disadvantage or clauses that burden the policyholder.

 

Standard policies or terms

22. What are the main standard policies or terms produced by trade associations or relevant authorities?

The Financial Supervisory Service has established the standard terms and conditions of an insurance contract (Standard Terms and Conditions) for each type of insurance product in the Detailed Rules on Supervision of Insurance Business. Insurers must base their insurance policies on the Standard Terms and Conditions.

 

Insurance and reinsurance policy claims

Establishing an insurance claim

23. What must be established to trigger coverage under an insurance policy?

The policyholder, the insured or the beneficiary under an insurance policy must notify the insurer without delay on the occurrence of a claim-triggering event. Insurers do not have to compensate for any additional loss caused by the failure of the policyholder, the insured or the beneficiary to notify the insurer that the event has occurred.

 

Third party insurance claims

24. What are the circumstances in which third parties can claim under an insurance policy?

An insurer does not have to pay for claims under liability insurance to the insured before a third party has been indemnified for losses caused by an accident attributable to the insured. In addition, a third party can directly request an insurer to indemnify for losses caused by an accident attributable to the insured, to the extent of the insured amount, provided that an insurer can assert a defence against the third party claim that the insured has in connection with the accident.

 

Time limits

25. Is there a time limit outside of which the insured/reinsured is barred from making a claim?

An insurance claim must be made within three years of a claim-triggering event.

Although the limitation period cannot be deleted or extended by negotiation between an insurer and the insured, it can be shortened. The standard terms and conditions of an insurance contract established by the Financial Supervisory Service (Standard Terms and Conditions) typically provide for a limitation period that is applicable under the Korean Commercial Code.

 

Enforcement

26. Can the original policyholder or other third party enforce the reinsurance contract against a reinsurer?

Where a cut-through clause (allowing the original policyholder to make a claim directly to a reinsurer up to a certain limit) is contained in the reinsurance contract, the original policyholder can enforce the reinsurance contract against the reinsurer.

However, in the absence of a cut-through clause, there are uncertainties because there are no law, regulation or court precedent on whether the original policyholder or other third party can enforce the reinsurance contract against a reinsurer.

However, if the insurer is insolvent or cannot provide coverage, the policyholder, the insured or the beneficiary can exercise the subrogation right under the Korean Civil Code and make a claim on behalf of the insurer against the reinsurer.

 

Remedies

27. What remedies are available for breach of an insurance policy?

Remedies for an insurer

If there is a misstatement or omission of a material fact by the policyholder, the insured or the beneficiary, the insurer can terminate the contract. In addition, if during the period of coverage, the possibility of the occurrence of a peril insured against has been substantially changed or increased, an insurer can request an increase in the premiums or terminate a contract within one month after it becomes aware of such fact.

Where the policyholder or the insured intentionally causes an accident and makes a claim, the insurer can file a criminal complaint for fraud against this person.

Remedies for a policyholder

When entering into an insurance contract, an insurer must deliver the standard terms and conditions of an insurance contract (Standard Terms and Conditions) to a policyholder and explain to him the important provisions of it. If the insurer violates such an obligation, the policyholder can cancel the contract within three months of the contract date.

 

Punitive damage claims

28. Are punitive damages insurable? Can punitive damages be reinsured if they are covered by an underlying policy?

There is no express statutory provision that prohibits an insurance policy from covering punitive damages. However, in general, the law does not recognise the concept of punitive damages and therefore it is very rare for an insurance policy to cover punitive damages.

 

Insolvency of insurance and reinsurance providers

29. What is the regulatory framework for dealing with distressed or insolvent insurance or reinsurance companies, or other persons or entities providing insurance or reinsurance related services? What regulatory and/or other protections exist for policyholders if the insurance company is insolvent?

Regulatory framework for dealing with distressed or insolvent insurers or reinsurers

If the interests of policyholders are negatively affected by a distressed or insolvent insurer or reinsurer, the Financial Services Commission (FSC) can:

  • Order the insurer or reinsurer to restrict the execution of insurance contracts.

  • Stop paying insurance proceeds.

  • Take other necessary measures.

If the financial status of an insurer or reinsurer fails to meet certain standards required by the FSC, the FSC can take measures to improve the financial condition of the insurer or reinsurance such as:

  • Issuance of warning or reprimand for the insurer or reinsurer.

  • A request or order for salary reduction.

  • Capital increase or reduction.

  • Property disposal.

Regulatory and/or other protections for policyholders against an insolvent insurer

Policyholders are insured up to KRW50 million under the Depositor Protection Act. The Insurance Business Law (IBL) also provides for a preferential right of insurance policyholders to receive the amount reserved for the insured from the insurer's assets.

The IBL also protects third parties in connection with liability insurance or auto insurance. If a third party suffers a damage or injury but the insurer cannot pay claims due to insolvency or other reasons, the General Insurance Association of Korea, instead of the insurer, pays the claims to the affected third parties.

 
30. Can excess insurance policies "drop down" to provide coverage if the primary insurer goes into insolvency?

There is no law or court precedent on this issue. So far, all the liabilities of insolvent insurers in Korea were transferred to other insurers with financial support from the government.

 
31. Is a right to set-off mutual debts and credits recognised in an insolvency proceeding involving an insurer or reinsurer?

The Debtor Rehabilitation and Bankruptcy Law provides for two types of insolvency proceedings in respect of insolvent business entities:

  • Rehabilitation proceedings.

  • Bankruptcy (liquidation) proceedings.

In bankruptcy proceedings, under the prevailing view, a creditor can exercise its set-off rights at any time, while in rehabilitation proceedings, the right of set-off can be exercised up to the expiry of the claim filing period.

 

Taxation of insurance and reinsurance providers

32. What is the tax treatment for insurers, reinsurers, and other persons or entities providing insurance and reinsurance-related services?

Insurance and reinsurance services are exempt from value added tax (VAT). However, actuary services are no longer exempted from VAT from July 2015 under the amended Value Added Tax Act.

Insurers and reinsurers that are domestic corporations or have a permanent establishment in South Korea must pay corporate income tax and education tax on premiums:

  • Net taxable income is subject to ordinary corporate income tax, which is levied at:

    • 11% (including surtax) for a tax base of KRW200 million or less;

    • 22% (including surtax) for a tax base ranging from KRW200 million to KRW20 billion;

    • 24.2% (including surtax) for a tax base exceeding KRW20 billion.

  • Education taxes are earmarked taxes that are imposed to secure funds for education. Education taxes are equal to 0.5% of total insurance business revenue (such as insurance premiums), after taking into account certain deductions (such as an increase in amounts set aside for policy reserves) and certain exceptions (such as reinsurance premiums paid out).

Non-admitted foreign insurers and reinsurers are not generally subject to corporate income tax and education tax on premiums in South Korea other than withholding tax on Korean-sourced interest and dividends, unless they have a permanent establishment in Korea.

 

Insurance and reinsurance dispute resolution

33. Are there special procedures or venues for dealing with insurance or reinsurance complaints or disputes?

If an insurer and a policyholder are in dispute, they can use the Financial Supervisory Service's dispute resolution process. If the parties accept the resolution decision under the process, it has the same effect as a court decision.

There are no special venues for dealing with insurance or reinsurance complaints or disputes and the parties can agree on a jurisdiction.

 
34. Are arbitration clauses in insurance and reinsurance agreements enforceable?

Arbitration clauses in insurance and reinsurance agreements are generally enforceable if such clauses meet the general requirements provided under the Korean Arbitration Act. There are no special restrictions or limitations provided for arbitration clauses in insurance and reinsurance agreements. However, arbitration clauses in insurance agreements that are signed between insurers and general customers are subject to the restrictions provided by the Standardised Contracts Regulation Act (SCRA). Under the SCRA, a standardised contract means a contract where one party to the contract (for example, an insurer) prepares in a specific form in advance in order to enter into contracts with multiple other parties (for example, general customers). Article 14 of the SCRA provides that "a clause requiring customers to agree to a jurisdiction that is unreasonably disadvantageous to customers" is null and void. Therefore, if an arbitration clause in a standardised insurance agreement puts customers in an unfavourable position, then such an arbitration clause could be deemed null and void.

 
35. Are choice of forum, venue and applicable law clauses in an insurance or reinsurance contract recognised and enforced?

The parties to insurance and reinsurance contract are free to agree forum, venue and applicable law clauses, and there are no special restrictions or limitations on these provisions (see Question 34). However, arbitration clauses in insurance agreements that are signed between insurers and general customers are subject to the restrictions provided by the SCRA. In addition, clauses regarding forum, venue and applicable law that are unreasonably unfavourable to customers are deemed null and void (Article 6, SCRA). According to the Guideline on Review of Standardised Contracts released by the Korean Fair Trade Commission, any clause requiring the policyholder to submit to the court with jurisdiction over the insurer or the court designated by the insurer would be viewed as constituting a breach of the SCRA.

 

Reform

36. What proposals are there for reform of the law, regulation or rules relating to the provision of insurance or reinsurance services?

Insurance Part of KCC

Certain amendments to the Insurance Part of the Korean Commercial Code came into force from 12 March 2015. The key points of the amendments are summarised as follows.

  • A provision concerning the insurer's existing obligation to inform the policyholder of important terms of the insurance contract has been strengthened for enhanced consumer protection. The insurer must now explain the terms of the insurance contract to the policyholder and when failing to do so, the policyholder can terminate the contract within three months from the date of the policy or the date on which the insurance contract was concluded.

  • A provision has been newly enacted to clearly specify the authority and powers of insurance agents. Therefore, insurance agents can receive the insurance premiums and notice of subscription and termination from a policyholder, insured or beneficiaries.

  • The statutory limitation period for the right to claim payment of insurance proceeds or the return of unearned premiums or reserves is extended from two to three years.

IBL and relevant regulations

In early 2015, the following amendments to the Insurance Business Supervisory Regulation have been made, among others:

  • Single insurance agents (selling a single specialised line of insurance products related to a single business) and single insurance solicitors (insurance solicitors belonging to a single insurance agent) are exempted from registration examinations given the fact that they sell only a very narrow line of insurance products. Although registration requirements are relaxed for single insurance agents, they are subject to the same regulations on insurance marketing and solicitation applicable to other insurance agents. The scope of insurance business that can be engaged in by single insurance agents is fire insurance, liability insurance, travel insurance and title insurance.

  • The amendments add a new category of image advertisement for insurance products that only provide a brief overview of such products for no longer than one minute. However, when advertising key terms of an insurance product, such as price and coverage, any conditions that must be satisfied must be explained in the same manner. The audio of image advertisements is not allowed to repeat the same terms of an insurance product three times or more.

  • Deductibles for a health insurance (covering actual medical expenses) must be 20% or more of the medical expenses actually incurred.

  • When selling an insurance product, any insurance premiums expected to be paid by the policyholder after his retirement must be explained to the policyholder.

 

Main insurance/reinsurance trade organisations

Korea Life Insurance Association

Main activities. The Korea Life Insurance Association carries out the following activities:

  • Improving the insurance systems and regulations for member companies.
  • Carrying out functions related to life insurance solicitors.
  • Protecting life insurance consumers.
  • Publishing books on statistics and bulletins.
  • Increasing public trust through public welfare service activities.
  • Conducting public relations activities.

W www.klia.or.kr

General Insurance Association of Korea

Main activities. The General Insurance Association of Korea performs the following activities:

  • Improving insurance systems.
  • Hosting international conferences and exchange information on the insurance industry.
  • Making insurance-related publications.
  • Improving solicitation systems.
  • Developing non-life insurance products and improve basic documents.

W www.knia.or.kr



Online resources

W www.law.go.kr/main.html

Description. This website is maintained by the Ministry of Government Legislation of South Korea and provides a search engine for all South Korean statutes that are up-to-date. The website provides English translations but they are for guidance purposes only.

W http://elaw.klri.re.kr/eng_service/main.do ( www.practicallaw.com/3-522-0279)

Description. This website provides the English translations of South Korean statutes. The English translations are for guidance purposes only.



Contributor profiles

Jae-Ho Baek

Kim & Chang

T +82 2 3703 1363
F +82 2 737 9091/9092
E jhbaek@kimchang.com
W www.kimchang.com

Professional qualifications. Korea, Lawyer, 1999; New York, Lawyer 2009

Areas of practice. Insurance; capital markets; investment management; securities regulations; foreign direct investment; mergers and acquisitions.

Languages. Korean, English

Professional associations/memberships. Korean Bar Association; New York State Bar Association.

Publications

  • Insurance and Reinsurance Global Guide 2015/16: South Korea Country Q&A (Co-author, Practical Law, Thomson Reuters, 2015).
  • The Insurance & Reinsurance Law Review (2nd edition): Korea chapter (Co-author, Law Business Research, 2014).
  • The Asset Management Review (1st edition): Korea chapter (Co-author, Law Business Research, 2012).
  • International Investment & ETFs Review 2011: Korea chapter (Co-author, Euromoney Yearbooks, 2011).

Hyun-Wook Shin

Kim & Chang

T +82 2 3703 1479
F +82 2 737 9091/9092
E hwshin@kimchang.com
W www.kimchang.com

Professional qualifications. Korea, Lawyer, 2001; New York, Lawyer, 2011

Areas of practice. Insurance; anti-trust and competition; mergers and acquisitions; foreign direct investment; privacy.

Languages. Korean, English

Professional associations/memberships. Korean Bar Association; New York State Bar Association.

Publications Insurance and Reinsurance Global Guide 2015/16: South Korea Country Q&A (Co-author, Practical Law, Thomson Reuters, 2015).


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