New Amendments to Insurance Regulations
to Vitalize InsurTech and Provide Protections 
through Source Limitations on Hybrid Bonds 

The FSC has notified and commenced a public discussion period to continue until 31 March 2019.  During this time, the FSC will accept and address inquiries and comments lodged from the insurance industry, stakeholders and the general public for consideration and follow up with possible additional changes to the pending amendments to the Enforcement Decree.  The FSC has set a target enactment date of 1 July 2019.

Under the Korean insurance regulations, Korean insurers and reinsurers can only own and operate subsidiaries under the prescribed list of specific businesses in Article 115 of the Insurance Business Act and Article 59 of the Enforcement Decree.  The current list does not include FinTech businesses, nor is there a general sub-section permitting for subsidiaries engaged in other insurance-related businesses.  By negative implication, insurers and reinsurers are currently unable to own subsidiaries offering FinTech and InsurTech products and services.

The amendment to the Enforcement Decree will insert a new general sub-section in Article 59(2). The sub-section will provide that insurers/reinsurers may own and operate FinTech and InsurTech subsidiaries engaged in businesses which are directly related to or are aimed at supporting the business of insurance and reinsurance.  The insurance company will require pre-approval from the FSC, and while the FSC’s specific approval criteria remains to be seen, it is known that the FSC has introduced the new sub-section in an effort to encourage insurers/reinsurers to invest into the FinTech and InsurTech industry.

As mentioned above, the amendment to allow FinTech and InsurTech businesses to be held by insurers and reinsurers is being implemented in parallel with other efforts to deregulate and stimulate the FinTech industry in Korea.  The upcoming amendments are accompanied by a number of other legislative moves including the recent deregulation of the rules surrounding cloud-based financial products and services, effected earlier in January this year, the ongoing amendments to the data protection and privacy laws/regulations of Korea, and the upcoming enactment of the Special Act for the Innovation of the Finance Industry in April later this year.

Following the deregulatory amendments to the Regulations on the Supervision of Insurance Business in April 2016, insurers/reinsurers have increasingly used hybrid bonds as a source of funds to support their business operations.  However, given the subordination risk and the sub-tier Risk-Based Capital (“RBC”) treatment of hybrid bonds (i.e., 50% recognition limit as calculated for equity capital), the FSC has determined that hybrid bonds should be treated as part of the class of restricted capital raising sources.

While hybrid bonds were already subject to certain issuance standards under the existing regulations and subject to a sub-tier treatment under the RBC standards, the new amendment to the Enforcement Decree will expressly require that hybrid bonds be classed as a restricted funding source.  Therefore, insurers and reinsurers must now assess whether the inclusion of the hybrid bond capital within the restrictedborrowing classes will result in the insurer/reinsurer exceeding the Article 58 equity capital cap.  Insurers and reinsurers may also need to arrange alternative sources of funds as part of its asset management, investment and capital modeling.