New Amendments to Insurance Regulations to Vitalize InsurTech and Provide Protections through Source Limitations on Hybrid Bonds
| On 19 February 2019, the Financial Services Commission of Korea (“FSC”) announced a number of changes to the Enforcement Decree to the Insurance Business Act (the “Enforcement Decree”). The amendments include two important changes for the insurance industry which are (1) the ability of licensed insurers/reinsurers to own InsurTech subsidiaries in Korea; and (2) the addition of an issuance limit on hybrid bonds as part of the asset management and investment portfolios for insurers/reinsurers. 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.
| Stimulation of the FinTech and InsurTech Industries with Insurer Subsidiaries | In conjunction with the recent establishment of the Regulatory Sandbox in Korea for FinTech businesses to develop and grow in Korea, the FSC has also modified its rules to now allow the establishment and operation of FinTech and InsurTech subsidiaries by insurers and reinsurers. 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. The ability of insurers/reinsurers to hold FinTech and InsurTech businesses will help Korea to be a more competitive jurisdiction for the insurance industry. As in recent years, many insurers/reinsurers continue to develop and prepare for the implementation of speedier and more efficient distribution, mobile-based insurance administration tools, digital wearables, big data based underwriting, asset management and investment software, and other cloud-based SaaS InsurTech offerings. It is expected that the new regulatory environment will continue to encourage new business and investment opportunities in the InsurTech space, and by the amendment to the Enforcement Decree, insurers/reinsurers in Korea will be able to directly engage in the continuing technological and innovative commercial development in the insurance industry. | New Issuance Limits for Hybrid Bonds of Insurers and Reinsurers | As part of the asset management and investment framework for insurers, funds that are raised from bonds and bills may not exceed the equity capital of the insurer or reinsurer pursuant to Article 58 of the Enforcement Decree. As a result of the amendment thereto, the FSC now adds hybrid bonds to the list of restricted capital raising sources. 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. | Forward | Lee & Ko will continue to monitor the progress of the proposed amendments including any results of the public discussion process and any additional changes to subordinate laws, regulations, guidelines, etc. The Insurance & Reinsurance Practice Group is prepared to discuss any questions you may have in relation to the proposed amendments to the Enforcement Decree and will also be happy to submit inquiries and/or comments to the FSC and liaise on your behalf through our expert attorneys and former FSC and FSS officials. Lastly, as a full services law firm, we are well-positioned to support in the establishment of FinTech and InsurTech companies and can also advise on your asset management and investment portfolios from a compliance perspective. | | | | | |
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