As at 30 September 2018, there were 24 life insurers and 30 non-life insurers (14 domestic insurance companies and 16 foreign insurance companies) in Korea. The gross profits earned by the life insurers during the first three quarters of 2018 was 4.39 trillion won, which is an increase of 6 per cent from the same period in 2017 (3.6 per cent of the average profit rate for invested insurance assets), and the gross profits earned by non-life insurers during the first three quarters of 2018 was 2.92 trillion won, a drop of 8.2 per cent from the same period in 2017 (3.4 per cent of the average profit rate for invested insurance assets).
The reinsurance market in Korea has stagnated after years of growth. The operating profit in the first half of 2018 dropped by 13.8 per cent due to large-scale incidents in and out of Korea, such as the Iranian oil tanker casualty in the East China Sea, the fire on board a car carrier at the Incheon Port, and fires at factories in China and Greece. Apart from Korean Re, all 10 reinsurers are foreign companies, the first entrant being Singapore's Asia Capital Re, which entered the Korean reinsurance market in September 2016. Korean Re's market share is going down with the increasing competition from foreign reinsurers. In 2018, the domestic life insurance market ranked eighth and the non-life insurance market ranked eleventh in the world in terms of revenue.
Both life insurers and non-life insurers experienced a difficult year in 2018. The outlook for 2019, however, is promising: while the life insurance market is still under pressure to inject more capital amid the adoption of the new International Financial Reporting Standard 17 (IFRS17), the non-life insurance market is anticipating a positive year with higher auto insurance premiums and weaker competition.
i The regulatory authorities
The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) regulate the insurance industry. The FSC prepares financial policies and systems (i.e., it legislates and amends the development plans and regulations of insurance business); monitors, inspects and sanctions financial institutions, including insurance companies; and approves the establishment of financial institutions, including insurance companies. The FSC regulates insurance business in accordance with the Insurance Business Law (IBL) and the Insurance Supervision Regulations.
The FSS is the executive arm of the FSC. It records the current status of insurance contracts and the financial status of insurance companies, monitors insurance companies' business operations, and sanctions insurance companies. The FSS also directly inspects and supervises insurance companies and their employees, including insurance brokers.
ii Position of non-admitted insurers
The IBL regulates the requirements for being in insurance business, and if such requirements are not satisfied, the FSC will not issue a licence. An insurer may not conduct insurance business without a valid business licence, the failure of which could result in imprisonment for up to five years or fines of up to 30 million won (Article 200-1 of the IBL).
iii Position of brokers
According to Article 89-1 of the IBL, insurance brokers must be duly registered with the FSC to perform the intermediate execution of insurance contracts. As insurance brokers are involved in the execution of insurance contracts, in many aspects they are similar to insurance agents. However, insurance brokers differ from insurance agents (who act on behalf of a particular insurance company) in that they liaise with multiple insurance companies. Article 92 of the IBL prohibits insurance brokers from being affiliated with one particular insurance company. Accordingly, insurance brokers have no authority to execute insurance contracts or collect insurance premiums on behalf of insurance companies.
iv Requirements for authorisation
Any person or entity wishing to perform insurance business should obtain a licence from the FSC, and Article 6 of the IBL details the requirements to obtain the licence. In particular:
- The minimum capital requirement for an insurance company with a comprehensive insurance business licence is 30 billion won (for an insurance company with a selected insurance business licence, the minimum capital requirement can be adjusted in accordance with the Presidential Decree for the IBL, provided that the amount exceeds 5 billion won). For an insurance company that markets or solicits by telephone, mail or computer communication only, the minimum capital requirement is reduced to two-thirds of the above.
- An insurance company should have a professional workforce and a suitable infrastructure (e.g., IT facilities). In cases where an insurance company outsources some of its work (e.g., review of insurance contracts, maintenance of IT facilities, investigation of insurance fraud), the outsourced work must also be done in compliance with the same requirement.
- An insurance company's business plan should be reasonable, and should not be contrary to public policy.
- An insurance company's principal shareholders should not be disqualified for any grounds under Article 13-1 of the IBL. They should also have the financial soundness and ample funding capacities without any record of harming the economic order.
A foreign insurance company seeking to obtain an insurance business licence in Korea must meet the following requirements:
- it should have operating funds equivalent to (or more than) the above-mentioned minimum capital requirements for domestic insurance companies;
- it should be in the same insurance business area in a foreign country in accordance with the law of that respective jurisdiction as the insurance business area it seeks to enter in Korea;
- its assets and financial and business soundness should be adequate to operate business insurance in Korea, and it should be recognised internationally; and
- it should satisfy the requirements of points (b) and (c) relating to domestic insurance companies.
In order to obtain a licence, an insurance company may first apply for a provisional licence upon which the FSC may place conditions. The company should indicate the type of insurance that it would offer under its company name. Companies not in the business of offering insurance may not use words in their company names or logo that may show or imply that they are an insurance company. Companies cannot operate both life insurance and non-life insurance business at the same time.
v Distribution of insurance products
According to Article 2-1 of the IBL, the term 'insurance product' means a contract stipulating the payment of insurance money and other benefits to an insured in the event that an incident for which the insured is protected against occurs.
According to Article 2-1 of the IBL, an insurance product can be any of the following:
- life insurance product: a contract that promises to pay stipulated money and other benefits to an individual in relation to the survival or death of an individual;
- non-life insurance product: a contract that promises to pay stipulated money and other benefits to an insured for a loss (including any loss resulting from non-performance of contractual liabilities or statutory duties and obligations) resulting from a contingency (excluding a disease, an injury and nursing thereof provided for in point (c)); and
- type 3 insurance product: a contract that promises to pay stipulated money and other benefits to an insured for any disease, injury or nursing thereof for the purpose of guaranteeing any risk.
vi Compulsory insurance
While most insurance contracts can be freely entered into between private parties, there are some types of insurance that must be purchased mandatorily. In particular, when a party is planning to be involved in an act that may cause damage to others, that party may be required to purchase insurance to ensure that it has the capacity to reimburse the damage.
The IBL does not have a separate section that compels the execution of insurance contracts. A party involved in a specific act or business, should check whether purchasing insurance is mandatory by reviewing the relevant laws.
vii Taxation of premiums
Under Article 26-1-11 of the Value-Added Tax Act, insurance business is exempt from value added tax (VAT); thus, no VAT should be imposed on the payment of insurance premiums. For the same reason, an insurance company that collects insurance premiums does not include any VAT in the premiums. Accordingly, when an insured pays an insurance premium, no VAT will be imposed, and an insurance company is also not obliged to pay any VAT.
In cases where an insurance policyholder purchases insurance under which his or her spouse or dependents are insureds, part of the paid insurance premium can be deducted from his or her income for the purpose of calculating his or her income tax.
When receiving death insurance money, if the insurance policyholder and the insured are not identical, the insurance money may be subject to inheritance tax or gift tax.
Insurance companies are obliged to pay corporate tax. For an insurance company whose net taxable income is less than 200 million won, the applicable tax rate is 10 per cent; for insurance companies whose net taxable income is between 200 million won and 20 million won, the applicable tax rate is 20 per cent; and for insurance companies whose net taxable income is greater than 20 billion won, the applicable tax rate is 22 per cent.
According to Article 9 of the Education Tax Act, insurance companies are obliged to pay education tax in an amount equivalent to 0.5 per cent of their net taxable income arising from, inter alia, stocks, bonds and foreign exchange derivatives.
Prior to November 2015, insurance companies were obliged to pay education tax on a quarterly basis. However, the law was amended to lower insurance companies' burden of taxation, and since November 2015, insurance companies have been obliged to pay education tax only once a year.
III INSURANCE AND REINSURANCE LAW
i Sources of law
The Korean Commercial Code (KCC) includes regulations that cover insurance in general, and its general provisions (e.g., on party autonomy) will also apply. In addition, various special laws, such as the IBL, the Automobile Accident Compensation Act, the Act on the Indemnification for Fire-Caused Loss and the Purchase of Insurance Policies, and the Depositor Protection Act, apply to insurance contracts.
It is common for insurance companies to draft general conditions and standard contractual terms in advance, and to adopt the same when executing insurance contracts (standard terms and conditions). The standard terms and conditions are binding on parties to insurance contracts, but if the parties agree otherwise on particular conditions, to the extent that those particular conditions apply, the standard terms and conditions would not apply.
ii Making the contract
The major elements of insurance contracts include the insurance money and insurance premium amounts, the risks covered by the insurance (the grounds for payment of the insurance money), insurers' obligations, insurance periods, exclusion clauses and the governing law clauses.
The insurers are obliged to inform the insureds of the 'material information' about the policy. Material information refers to information that has a grave impact on the insureds' interests such that, if made known to the insureds, it could influence their decision on whether or not to sign the contract. Examples of material information include, for car insurance, information about the main driver to be covered; and for casualty insurance, exemption clauses for climbing and hand-gliding or other similarly dangerous activity, or exemption for driving without a licence. Insurers must provide the insured with the insurance policy and explanation thereof at least by the time of the insured's subscription. In cases where the insurer's obligation of explaining and notifying the terms of the insurance policy is breached, the insurer cannot argue that those terms are included in the insurance contract.
Insurance policyholders and the insureds are obliged to inform insurers of 'important matters'. Important matters are those that, if they had been known to the insurer at the time of execution of the insurance contract, would have resulted in the insurer not executing the contract under the same terms. Examples of important matters include, for fire insurance, the materials of an object, the structure of the object and the circumstances surrounding the object; for car insurance, a car's model and the purpose of the car; and for life insurance, an insured's gender, age and medical history.
A breach of the obligation to notify in an insurance contract is considered to be, for important matters, failure to notify or insufficient notice, committed intentionally or in gross negligence. Intentional breach by a person refers to a failure to notify when he or she is aware of the important matter that has not been notified or the notice was intentionally untruthful. Grossly negligent notice means that a person has failed to acknowledge the importance of the matter to be notified or he or she was unaware the matter was important.
In cases where the obligation of notifying important matters is breached, an insurance contract may be terminated by an insurer and the burden of proof for establishing the breach rests with the insurer. However, if the policyholder can prove that the breach has no causal relationship with the occurrence of an insured accident, the insurance money can be claimed. In addition, in cases where an insurer knew about the important matters that were not notified or, through its own fault, was ignorant of the important matters, the insurer would not be permitted to terminate the insurance contract.
iii Interpreting the contract
When interpreting insurance contracts, if there is a conflict between the standard terms and conditions and any particular conditions, the latter should prevail. The standard terms and conditions should also be interpreted impartially in accordance with the doctrine of good faith, and they should not be interpreted differently for different insurance policyholders. In cases where the standard terms and conditions are not clearly written, they should be interpreted against the insurer, and the exclusion clause of the standard terms and conditions should be narrowly defined.
Upon the occurrence of an insured accident, the relevant insured and the beneficiary of the relevant insurance can claim for the applicable insurance money. The statute of limitations for the right to claim payment of insurance money is three years (Article 662 of the KCC). The insurers' right to claim payment of insurance premiums is two years (Article 662 of the KCC). When an insurance policyholder, an insured or a beneficiary notices the occurrence of an insured accident, it should be immediately notified to the relevant insurer. If any loss was caused or increased by the policyholder's, insured's or beneficiary's failure to notify the occurrence of the insured accident, the insurer shall not be liable for compensation for the increased loss.
When a policyholder or an insured notices that the likelihood of the occurrence of an insured accident greatly increases during the insurance period, this information should be notified to the insurer, and if the duty to notify is neglected, the insurer may terminate the insurance contract. In cases where the increased likelihood of the occurrence of an insured accident is because of wilful or gross negligence on the part of a policyholder, insured or beneficiary, the insurer can terminate the insurance contract.
If a peril insured against has occurred because of bad faith or gross negligence on the part of a policyholder, insured or beneficiary, the insurer is not liable to pay the insurance money (Article 659-1 of the KCC). If a peril insured against has been caused by war or other public disturbances, the insurer is not liable to pay the insurance money unless agreed otherwise (Article 660 of the KCC).
IV DISPUTE RESOLUTION
i Jurisdiction, choice of law and arbitration clauses
When a dispute arises in relation to an insurance contract in Korea, it can be resolved through court proceedings, arbitration or financial dispute mediation by the FSS. However, there is no court exclusively designed to resolve insurance disputes, and there is no arbitral institution or procedure that exclusively deals with insurance disputes. Thus, insurance disputes must be resolved in the civil court or through arbitration proceedings in the same way as other general cases.
When a Korean court finds that a dispute has substantial connection with Korea, it has international jurisdiction over the dispute. More specifically, under Korean law, the Korean court has jurisdiction to hear a case when the policyholder's residence or the insurance company's principal place of business is located at the place where the Korean court has jurisdiction; this can be changed by the parties' agreement. Arbitration cases are generally resolved through arbitration proceedings at the Korean Commercial Arbitration Board (KCAB).
When the parties have expressly or impliedly agreed to a governing law, that law shall apply. In other words, the parties' agreement on the governing law will be considered valid. In cases where there is no agreed governing law, the applicable governing law shall be determined pursuant to the Korean Private International Act.
FSS-conducted financial dispute mediation is available to resolve disputes arising between customers and financial institutions (e.g., insurance companies) that are subject to FSS supervision.
According to Article 51 of the Act on the Establishment, etc. of Financial Services Commission, the Financial Disputes Mediation Committee (FDMC) was established to examine and decide on issues and conflicts between interested parties with respect to insurance. Accordingly, when there is a conflict with respect to insurance between an insurance company and other interested parties, the parties may request the FDMC to handle the case.
Once a case is submitted to the FSS, the head of the FSS may examine the case by requesting an insurance company to submit a report on the insurance company's business or assets, or any other relevant documents; and by summoning the concerned parties and requesting their testimonies. In accordance with Article 53-2 of the Act on the Establishment, etc. of Financial Services Commission, the head of the FSS may recommend that the parties settle the matter amicably. In the event that the case is not settled amicably, in accordance with Article 53-3, the case may be submitted to the FDMC. After reviewing the case, the FDMC may issue a mediation order and request the parties to accept the same. If the parties accept the mediation order, it will have the same effect as a reconciliation decision issued by a court (Article 55). The parties may not accept the mediation order or file a lawsuit in the middle of mediation proceedings.
The judiciary system comprises three levels: the first instance courts, the Appellate Court and the Supreme Court. Legal proceedings are commenced by a plaintiff's submission of a complaint to a first instance court with competent jurisdiction, and the plaintiff will submit relevant supporting documents along with the complaint. While it is not required to notarise documents to be submitted to the court, powers of attorney and certificates of corporate nationality (which need to be submitted in cases where a foreign corporate entity is a party to the litigation) must be notarised.
A plaintiff will be required to pay stamp tax and service of process fees when commencing a lawsuit, and stamp tax will take up a substantial portion of the court costs. Stamp tax is calculated in accordance with a formula set by Korean law based on the claim amount. In cases where the plaintiff is not a Korean resident and does not have an office in Korea, the Korean court can order, ex officio or pursuant to the defendant's application, the plaintiff to provide security for legal costs. The amount of security for legal costs will be calculated in accordance with the rules set forth by the Supreme Court based on the total legal costs (including attorneys' fees) that will be incurred at each level of court. The recoverable attorneys' fees have slightly increased after the amended rules took effect on 1 April 2018. As the defendant is entitled not to respond to the complaint until the plaintiff has paid the security for legal costs, it is general practice that plaintiffs pay security for legal costs in order to continue with the proceedings. The winning party can recover its legal costs (albeit not fully) from the losing party.
While the time frame is subject to change depending on the complexity of a case, it generally takes eight to 10 months from the commencement of the proceedings for the first instance court to render its judgment. In cases of appeal proceedings, it generally takes six to eight months until the Appellate Court's judgment. Finally, it takes approximately one to two years until the Supreme Court renders its judgment.
In arbitration proceedings through the KCAB, parties will appoint one or multiple arbitrators from among the arbitrators recommended by the KCAB. While arbitration proceedings through the KCAB do not differ much from court procedures, in international arbitration proceedings where a foreign company or foreign personnel are involved, the parties can choose the language to be used in the proceedings. An arbitral award will have the same effect as a judgment, and arbitration proceedings will not be as costly as court proceedings. Moreover, an arbitral award is rendered more promptly than a court judgment.
In 2016, the KCAB amended its International Arbitration Rules (the Rules) to secure autonomy and fairness of arbitration tribunals and to promote effectiveness of international arbitration. The amended Rules came into effect on 1 June 2016. The Rules are not markedly different from the previous version, with the exception of the procedure for an emergency arbitrator. By appointing an emergency arbitrator, parties can now ask for immediate preservation and temporary injunction even before the constitution of an arbitration tribunal.
Korea is a party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). Thus, an arbitral award duly delivered by the KCAB can be recognised and enforced in other countries that are party to the New York Convention, and foreign arbitral awards rendered by other countries that are parties to the New York Convention will be recognised and enforceable in Korea. Further, Korean courts will even recognise arbitration awards rendered in foreign countries that are not party to the New York Convention by applying standards similar to those used to determine the enforceability of foreign judgments in Korea.
A typical mediation procedure is conducted by a court. Mediation can be held upon the parties' application or at the court's discretion during legal proceedings, and a case may be referred to the Mediation Committee whereby parties will come to a reasonable level of agreement. Mediation decisions, once finalised, have the same legal effect as court judgments. In cases where parties are unable to come to an agreement through mediation, they can continue with court proceedings and resolve the matter through a court judgment.
V YEAR IN REVIEW
On 17 April 2018, the Amendment of the Act on the Establishment of Financial Services Commission was put into effect. In accordance with the Amendment, if a person applies for mediation to the FSS in an insurance dispute, the time-bar on the person's claim will stop running. The time-bar will then start running again when the person accepts the mediated proposal or when the mediation proceedings end without a resolution. This Amendment was enacted to promote mediation for insurance-related disputes and to respond to criticism that the short length of the time-bar for an insurance claim was inadequate to protect the rights of the legitimate insurance consumers.
Meanwhile, the International Accounting Standards Board has decided to postpone the implementation of IFRS17 by one year to 2022. As interest rates keep declining, however, insurers are still under pressure to inject capital before the implementation of IFRS17, and the need for the government to take measures and put in policies to ease the financial burden on insurers.
VI OUTLOOK AND CONCLUSIONS
According to an Issue Analysis Report published by the Korea Insurance Research Institute on 21 May 2018, the average age of a person obtaining a life insurance policy is rising, as a result of the aging population, relatively slower growth in the income of younger generations and the increase in the number of micro-households. These changes are expected to continue and insurers will be under pressure to diversify business, and come up with a variety of insurance products and strategies to cope.
1 S W Park is a partner at Law Offices Choi & Kim.