89501 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The World Bank does not guarantee the accuracy of the data included in this work. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The material in this publication is copyrighted. FINANCIAL SECTOR ASSESSMENT PROGRAM REPUBLIC OF KOREA INSURANCE CORE PRINCIPLES DETAILED ASSESSMENT OF OBSERVANCE MAY 2014 This Detailed Assessment Report was prepared in the context of a joint World Bank-IMF Financial Sector Assessment Program mission in in April and July 2013 led by Krishnamurti Damodaran, World Bank and Ghiath Shabsigh, IMF, and overseen by Finance and Private Sector Development Vice Presidency, World Bank and the Monetary and Capital Markets Department, IMF. Further information on the FSAP program can be found at www.worldbank.org/fsap. THE WORLD BANK FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY EAST ASIA AND PACIFIC REGION VICE PRESIDENCY CONTENTS I. ASSESSMENT OF INSURANCE CORE PRINCIPLES ...................................................................... 1 A. Introduction and Scope ............................................................................................. 1 B. Information and Methodology Used for Assessment ............................................... 1 C. Overview—Institutional and Macro Prudential Setting ........................................... 2 D. Preconditions for effective insurance supervision.................................................... 4 II. DETAILED PINCIPLE-BY-PRINCIPLE ASSESSMENT ................................................................ 10 Text Tables Table 1. Korea: Summary of Observance with the ICPs…………………………………...….4 Table 2. Korea: Summary of Observance Level…………………………………………....….6 Table 3. Korea: Recommendations to Improve Observance of ICPs…………………...….….7 Table 4. Korea: Detailed Assessment of Observance of the ICPs……………………...…….15 i GLOSSARY AND ABBREVIATIONS FSC Act Act on the Establishment, etc., of Financial Services Commission IBA The Insurance Business Act ASIFI Act on the Structural Improvement of the Financial Industry MOSF Ministry of Strategy and Finance BoK Bank of Korea KDIC Korea Deposit Insurance Corporation KIDI Korea Insurance Development Institute RAAS Risk Assessment Application System RBC Risk Based Capital ii EXECUTIVE SUMMARY 1. The insurance supervisory system in Korea shows a high level of observance of the Insurance Core Principles (ICPs) of the International Association of Insurance Supervisors (IAIS). This high level reflects a strong commitment in Korea to international standards. The engagement of the FSC and FSS with the IAIS, the FSB and through Korea’s G-20 membership has certainly contributed positively to this commitment and the quality of implementation. 2. The regulatory structure, although complex, is well developed compared to international norms. The authorities have implemented IFRS accounting standards, updated the capital regime to a sophisticated risk based capital approach, and many other regulatory requirements in a proactive and timely manner. Limited weaknesses in the regulatory structure are well understood by the authorities and can be expected to be addressed. 3. Compared to the previous FSAP, reforms have been made that are now proactive to achieve best practices rather than remedial in response to the financial crisis of the late 1990s. 4. Supervisory developments also reflect some significant strength. The authorities have developed a solid risk assessment application system (RAAS). Attention to insurance fraud, particularly through the use of a centralized database, is impressive. 5. The insurance sector in Korea has long been one of the most significant in the world in terms of penetration. Total premium stood at 149.9 trillion KRW (134 billion USD) in 2011 ranking it the eighth largest in the world. Insurance penetration stood at 11.6 percent and was ranked 5th in the world and insurance density stood at USD 2,660 per person ranked 23rd in the world. Despite the high penetration, continued growth is expected particularly in retirement savings products given the expectations for demographic aging. 6. There are 55 insurers, up from 50 five years earlier. There are 24 life insurers and 31 non-life insurers. Included in the defined non-life insurance companies are nine reinsurers. Insurers can operate as local entities or foreign branches, and there are 26 foreign insurers, including 14 that operate as branches. Seven insurers are part of defined financial groups, six having a bank holding company. Agency distribution has been the predominant channel. Insurance market concentration indicates an open and competitive market. Insurers constitute around 20 percent of total financial sector assets. All of the large insurers are substantially domestic with both assets and premiums attributable to their domestic business at levels well above 90 percent. They do not currently meet the expected criteria for either IAIS Global Systemic Insurers or Comframe IAIG supervision. 7. Negative interest rate spreads remain an issue but the challenges have been mitigated substantially by having recognized the issue well before many other jurisdictions. The late 1990s financial crisis brought the issue to attention and led to timely corrective actions, well before many other countries addressed similar challenges. An active program of monitoring these risks through stress testing and other methods, along with actions by insurers has greatly reduced this risk and it is expected that insurers are sufficiently resourced. However, the risk remains albeit at reduced levels and needs to be monitored on an ongoing basis. iii 8. Insurer profitability and capital are solid for both life and non-life insurance. Capital levels have built over time through injections and retained profits, and comfortably meet requirements. 9. Supervision of the insurance industry in Korea is the responsibility of the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS). The original FSC was established in 1998 but underwent an important change in 2008 when it was elevated in status and took on additional policy responsibilities. The FSC delegates inspection and supervision activities, including by specifying procedures, to the FSS. 10. Industry capacity for enhanced ERM will take time to mature. Continuing the development of risk management capacity can be supported by current initiatives to enhance requirements. Observance will be improved further as ongoing initiatives progress. Enhanced risk management, group supervision will become more important and can be enhanced progressively using existing platforms for cooperation. G-SIFI and ComFrame could be relevant for Korea at least as a host supervisor in the short term. Becoming a signatory to the IAIS MMoU is in progress. iv I. ASSESSMENT OF INSURANCE CORE PRINCIPLES A. Introduction and Scope 1. This report is an assessment of Korea’s compliance with International Association of Insurance Supervisors’s Insurance Core Principles (ICPs), as adopted in October 2011. The review was carried out as part of the 2013 Financial Sector Assessment Program (FSAP) assessment of Korea, and was based on the regulatory framework in place, the supervisory practices employed, and other conditions as they existed in April 2013. The assessment was carried out by Craig Thorburn, Lead Insurance Specialist, Non-Bank Financial Institutions Group, Capital Markets Practice, World Bank. B. Information and Methodology Used for Assessment 2. The assessment uses the version of the IAIS Insurance Core Principles (ICPs) adopted in October 2011. The revised ICPs reflected a range of revisions from the earlier versions issued in 2003 and 1999. Whilst some of the revisions can be considered to be in the nature of clarifications in wording, others represent a significant increase in expectations of supervisory and regulatory requirements compared to the earlier version especially those that were introduced motivated by the outcomes of the financial crisis of 2007 and following. 3. The IAIS prescribes a methodology for assessing the ICPs that has been followed in this assessment. The methodology is substantially unchanged since the first version of the ICPs was prepared. The assessment considers regulatory requirements and supervisory procedures as well as actual outcomes in practice based on observed experience. That is, for example, a well-designed comprehensive law would not be sufficient of itself to secure observance of principles. The IAIS Thematic Peer Reviews also provide additional guidance on consistent interpretation of the ICPs for assessment purposes. The assessment methogology also addresses definitions of gradings and the treatment of proposed reforms. 4. The level of observance for each ICP reflects the assessment of the various standards there under. Each ICP is rated in terms of the level of observance as follows:  Observed—whenever all the standards are considered to be observed or when all the standards are observed except for a number that are considered not applicable.  Not Applicable—when the standards are considered to be not applicable.  Largely Observed—where only minor shortcomings exist, which do not raise any concerns about the authorities’ ability to achieve full observance.  Partly Observed—where, despite progress, the shortcomings are sufficient to raise doubts about the authorities’ ability to achieve observance.  Not Observed—where no substantive progress toward observance has been achieved. 5. The assessment is based solely on the laws, regulations, and other supervisory requirements and practices that were in place at the time of assessment. The assessment is specific to the date of the analysis. Ongoing regulatory initiatives, new practices that are proposed, or other potential influences on ratings in the future are noted by way of additional comments. The assessment drew upon copies of laws and regulations, financial statistics, 1 publications and other market information including material issued by industry associations, insurers and other stakeholders, relevant to the insurance sector in Korea. 6. The assessment has been informed by discussions with regulators and market participants. The assessor met with staff from FSC and FSS, various insurers and reinsurers, industry associations, professional bodies, and research institutes. The assessor had access to a complete self-assessment on the ICPs and responses to a detailed questionnaire that had been provided by FSC and FSS prior to the commencement of the exercise. The assessor also was informed by reports prepared by the IAIS in their thematic peer review processes where Korea participated. The assessor is grateful for the full cooperation extended by all. The efforts required by FSC and FSS to prepare the self-assessment, as well as its tremendous support during the mission, are especially appreciated. C. Overview—Institutional and Macro Prudential Setting 7. The insurance sector in Korea has long been one of the most significant in the world in terms of penetration. Total premium stood at 149.9 trillion KRW (134 billion USD) in 2011 ranking it the eighth largest in the world after the US, Japan, France, UK, Germany, China and Italy respectively and larger than Canada (9th) and Australia (11th). Insurance penetration, premium compared to GDP, stood at 11.6 (12.0 on AXCO) percent and was ranked 5th in the world (7.1 percent for life insurance and 4.9 percent for non-life) and insurance density (premium per capita) stood at USD 2,660 (AXCO 2,777) per person ranked 23rd in the world1. Despite the high saturation, continued growth is expected particularly in retirement savings products given the expectations for demographic aging. 8. There are 55 insurers, up from 50 five years earlier. There are 24 life insurers and 31 non-life insurers. Both life and non-life insurers have increased in number over the last 10 years. Included in the defined non-life insurance companies are nine reinsurers, one guarantee insurer and five “single line” specialist companies. Insurers can operate as local entities or foreign branches, and there are 26 foreign insurers, including 14 that operate as branches. Seven insurers are part of defined financial groups, six having a bank holding company. Agency distribution has been the predominant channel and there are over 477,000 agents as at the end of 2012 (close to one per 100 persons in the population). Banc-assurance has been introduced and is being advanced by some companies. 9. Insurance market concentration indicates an open and competitive market benchmarked against global datasets. The Herfindahl Index in the life sector stood at 1,161 and the non-life sector reported 1,493. The top five insurers have a market share of 71 percent in the life sector and 73 percent for non-life insurance2. 10. Insurers constitute around 20 percent of total financial sector assets. Whether or not they are domestically systemic will be a useful consideration. Although they are significant in the domestic market, locally owned insurers have expanded outside Korea only recently. All of the large insurers are substantially domestic with both assets and premiums 1 Note that figures used for international comparisons are sourced from the AXCO dataset. 2 For a discussion on benchmarking concentration measures across jurisdictions see Thorburn (2008). 2 attributable to their domestic business at levels well above 90 percent. They do not currently meet the expected criteria for either IAIS Global Systemic Insurers or Comframe IAIG supervision. 11. Negative interest rate spreads remain an issue but the challenges have been mitigated substantially by having recognized the issue well before many other jurisdictions. The late 1990s financial crisis brought the issue to attention and led to corrective actions well before many other countries addressed similar challenges. An active program of monitoring these risks through stress testing and other methods, along with actions by insurers has greatly reduced this risk and it is expected that insurers are sufficiently resourced. However, the risk remains albeit at reduced levels and needs to be monitored on an ongoing basis. 12. Insurer profitability shows solid results for both life and non-life insurance. As is often the case, some classes of business are not profitable, particularly motor insurance, but other classes and investment results have offset the class specific losses to generate overall profit results. 13. Capital levels have built over time through injections and retained profits, and comfortably meet requirements. The coverage for life insurers is over three times the minimum and non-life and reinsurers both have double the minimum on average. 14. Supervision of the insurance industry in Korea is the responsibility of the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS). The FSS and FSC oversee insurers, reinsurers, and insurance distributors. In addition, they also have responsibilities for banks, other non-bank credit and savings entities including credit unions and credit cooperatives, and a range of securities market participants. It also oversees financial holding companies (FHCs) being entities that control financial institutions. 15. The original FSC was established in 1998 but underwent an important change in 2008 when it was elevated in status and took on additional responsibilities for financial policy that were formerly in the then Ministry of Finance and Economy3. The FSC has a broad mandate to oversee and regulate the financial sector. 16. The FSC delegates inspection and supervision activities, including by specifying procedures, to the FSS which is well resourced and respected. The Korea Deposit Insurance Corporation (KDIC) maintains a policyholder protection fund against insurance failure. 17. The Korea Insurance Development Institute (KIDI) plays a useful role supporting technical development across the sector. The KIDI was established as a ratemaking organization in support of a tariff based regime. This regime was abolished in 2000 although KIDI continues to review rating adequacy for non-life insurers on an annual basis. Membership includes both life and non-life companies. The life and general insurance 3 In 2008, the financial policy function of the Ministry of Finance was merged with the regulatory function of the previous FSC, leading to the current FSC; a separation was also introduced between the policy and execution functions by dividing the of FSC Chairman and FSS Governor positions. 3 associations also play a role in support of the industry through the collation and publication of industry sector statistics in addition to the usual industry association roles. D. Preconditions for effective insurance supervision 18. The Korean Government framework for financial sector policy involves the MOSF, FSC, FSS, BoK and KIDC. The MOSF, under the Government Organization Act has responsible for overall formulation of policy whilst price stability and monetary policy falls to the BoK. The FSC has specific policy responsibilities in terms of financial sector oversight. 19. The infrastructure supporting the insurance sector includes an independent judiciary. The independence of the judiciary is determined by the constitution. A range of commercial and civil laws provides the usual framework for legal and property rights relevant to insurance. Korea has implemented IFRS accounting standards. The actuarial profession has grown strongly since the start of this century and is in the process of full membership of the International Actuarial Association. 20. Financial markets are open, efficient and liquid. The Korean financial markets are well developed and provide a diverse range of instruments in a deep and liquid market as would be expected of a financial centre in the region. Corporate governance is generally well regulated, supported by requirements for outside directors and a developed legal system. 21. Table 1 summarizes the observance of the ICPs arising from this assessment. Table 1. Korea: Summary of Observance with the ICPs Insurance Core Principle Level Overall Comments 1 - Objectives, Powers and O The requirements meet the standards of this core Responsibilities of the Supervisor principle. 2 - Supervisor LO The FSS and FSC arrangements are largely in line or above with international standards although some enhancement to legal protection in practice and to reduce the risk of politicization of the leadership positions is suggested. 3 - Information Exchange and O The requirements meet the standards of this core Confidentiality Requirements principle. 4 - Licensing O The requirements meet the standards of this core principle. 5 - Suitability of Persons LO The authorities should extend oversight to key persons in control functions regardless of their formal management position, and should consider more formal criteria that relate to collective adequacy of boards and the possibility that any person (not just those specified) might be over- extended. The obligation on insurers to self-monitor and report suitability could be made more formal. 6 - Changes in Control and Portfolio O The requirements meet the standards of this core Transfers principle. 7 - Corporate Governance O The requirements meet the standards of this core 4 Insurance Core Principle Level Overall Comments principle. 8 - Risk Management and Internal LO The approach to regulation, particularly regarding Controls internal controls, actuarial obligations, and compliance, is fully observed. Risk management is one area where observance will be fully achieved as industry capacity improves and internalizes risk management approaches throughout the business operations. 9 - Supervisory Review and Reporting O The requirements meet the standards of this core principle. 10 - Preventive and Corrective Measures O The requirements meet the standards of this core principle. 11 - Enforcement O The requirements meet the standards of this core principle. 12 - Winding-up and Exit from the Market O The requirements meet the standards of this core principle. 13 - Reinsurance and Other Forms of O The requirements meet the standards of this core Risk Transfer principle. 14 - Valuation LO The continued use of historic cost as a part of the valuation system will reduce in relevance over time but does, in the interim period, reduce the transparency and consistency of the approach somewhat. 15 - Investment O Noting that larger insurers tend to have more advanced risk management processes and their limit setting approach tends to be more robust, the FSS could reinforce shift to more risk based approach within the limit structure. 16 - Enterprise Risk Management for LO The FSS and FSC are developing requirements to Solvency Purposes introduce an ORSA system for insurers based on some guidelines that are under discussion. It is also planning to have detailed requirements added to regulations for ERM. There is a good deal of potential detail that can be implemented as ERM capacity develops in Korean insurers and the approach of doing so of having a guideline would be good. The rating of LO is justified given the successful implementation of major reforms in a timely manner in the Korean market. 17 - Capital Adequacy LO The absence of a group capital requirement should be addressed. 18 - Intermediaries O Whilst the FSS and the legal requirements are sufficient, the FSS might consider some more proactive and anticipatory approaches to ensure its presence in the area is given a higher profile. 19 - Conduct of Business O The requirements meet the standards of this core principle. 20 - Public Disclosure O The requirements meet the standards of this core principle. 5 Insurance Core Principle Level Overall Comments 21 - Countering Fraud in Insurance O The very impressive approach can be further leveraged to improve value to clients and efficiency in insurers. 22 - Anti-Money Laundering and LO The shortcomings in the AML regime, including the Combating the Financing of need to specifically address domestic politically Terrorism exposed persons, should be addressed to achieve full observance. 23 - Group-wide Supervision PO The authorities should advance supervisory college considerations with respect to larger groups that are internationalizing. The FSS should also request participation in colleges for foreign insurers utilizing their international network to minimize costs. Consideration to strengthening the voluntary nature of the FHC laws with either stronger indirect oversight or compulsion would have merit. 24 - Macroprudential Surveillance and O The FSS should continue to develop its capacity to Insurance Supervision identify emerging risks relevant to the insurance sector and the treatment of these in integrated stress testing, particularly where insurers are part of financial groups, and could further diversify the range of sources that might suggest issues for further analysis such as consideration of legislative changes on insurance experience. 25 - Supervisory Cooperation and LO The authorities should look to deepen engagement Coordination in cooperation activities relating to groups (FHC approved or not) by exploring exchange of understanding of supervisory issues at operational levels and contingency planning. 26 - Cross-border Cooperation and LO The authorities should look to deepen engagement Coordination on Crisis Management in cooperation activities relating to groups (FHC approved or not) by exploring exchange of understanding. Discussion on expectations in the event of insurer distress as part of preliminary planning with key counterpart jurisdictions to take the elaboration to a deeper level of operational detail. The authorities should continue the IAIS MMoU process. 22. Table 2 provides a summary of the level of observance, consistent with the high level noted. In large part, the level of observance reflects a high effort on the part of the authorities to maintain regulatory requirements and practices in lines with best practices, and their ability to quickly adopt international standards as they are promulgated. Table 2. Korea: Summary of Observance Level Observed (O) 16 Largely observed (LO) 9 Partly observed (PO) 1 Not Observed (NO) 0 Total 26 6 23. Table 3 lists the suggested steps for improvement of the already high level of observance. These tend to reflect actions that are already in progress but yet to be fully operational. In particular, improvements in the risk management systems in insurers, supported by a continuing shift toward risk based supervisory approaches, will secure many of the improvements. Some changes to legal scope are also suggested, most particularly with respect to supervision of groups. Table 3. Korea: Recommendations to Improve Observance of ICPs Insurance Core Principle Recommendations 2 - Supervisor Measures to enhance the political independence of the governing bodies could be considered. Legal protection arrangements should be strengthened further. 5 - Suitability of Persons The authorities should extend oversight to key persons in control functions regardless of their formal management position, and should consider more formal criteria that relate to collective adequacy of boards and the possibility that any person (not just those specified) might be over- extended. The obligation on insurers to self-monitor and report suitability could be made more formal. 8 - Risk Management and Internal Efforts to encourage more effective enterprise risk Controls management in insurers should be continued. 15 - Investment Noting that larger insurers tend to have more advanced risk management processes and their limit setting approach tends to be more robust, the FSS could reinforce shift to more risk based approach within the limit structure. 16 - Enterprise Risk Management for The FSC FSS should press ahead with efforts that Solvency Purposes encourage a risk based approach to implementing ORSA and ERM processes within insurers, in an effort to ensure continued focus on the maturing risk management technical developments that insurers are pursuing. 17 - Capital Adequacy The absence of a group capital requirement should be addressed. 18 - Intermediaries Whilst the FSS and the legal requirements are sufficient, the FSS might consider some more proactive and anticipatory approaches to ensure its presence in the area is given a higher profile. 22 - Anti-Money Laundering and The shortcomings in the AML regime, including the need Combating the Financing of to specifically address domestic politically exposed Terrorism persons, should be addressed to achieve full observance. 23 - Group-wide Supervision The authorities should advance supervisory college considerations with respect to larger groups that are internationalizing. The FSS should also request participation in colleges for foreign insurers utilizing their international network to minimize costs. Consideration to strengthening the voluntary nature of the FHC laws with either stronger indirect oversight or compulsion would have merit. 24 - Macroprudential Surveillance and The FSS should continue to develop its capacity to Insurance Supervision identify emerging risks relevant to the insurance sector and the treatment of these in integrated stress testing, particularly where insurers are part of financial groups, and could further diversify the range of sources that might 7 Insurance Core Principle Recommendations suggest issues for further analysis such as consideration of legislative changes on insurance experience. 25 - Supervisory Cooperation and The authorities should look to deepen engagement in Coordination cooperation activities relating to groups (FHC approved or not) by exploring exchange of understanding of supervisory issues at operational levels and contingency planning. 26 - Cross-border Cooperation and The authorities should look to deepen engagement in Coordination on Crisis cooperation activities relating to groups (FHC approved or Management not) by exploring exchange of understanding. Discussion on expectations in the event of insurer distress as part of preliminary planning with key counterpart jurisdictions to take the elaboration to a deeper level of operational detail. The authorities should continue the IAIS MMoU process. Authorities’ responses to the assessment The Financial Services Commission and the Financial Supervisory Service of Korea (FSC/FSS) welcome the IMF/World Bank’s review of Korea’s regulatory and supervisory framework for the insurance sector. The FSC/FSS are firmly committed to the FSAP process, as it provides many valuable insights into the authorities’ effort to continuously review and improve Korea’s regulatory and supervisory framework for the insurance sector. The FSC/FSS also appreciate this opportunity to comment on the review, and there are some areas where the authorities do not agree on the assessment or would like to provide further thoughts on. With respect to the ‘suitability of persons’ principle, the IMF/World Bank recommends that the Korean authorities should extend oversight to key persons in control functions regardless of their formal management position. However, in accordance with Article 13 of the Insurance Business Act and Article 19 of the Enforcement Decree of the Insurance Business Act, the FSC/FSS review the fitness and propriety of every key person of an insurance company who exercises material influence on management decisions, regardless of his or her formal management position. On the ‘enforcement’ principle, the assessment noted that the FSS can fine or remove individuals for 2 or 5 years. The FSC/FSS wish to add that Article 134 of the Insurance Business Act provides a firm legal basis to impose a wider range of sanctions on insurance companies and their executives/employees, which include but not limited to monetary penalty and suspension from duties. The FSC/FSS would also like to take this opportunity to share one of the key post-assessment changes in Korea’s regulatory framework for insurance companies. Following the submission of comments on the IMF/World Bank’s draft assessment in May, the authorities laid the groundwork for the implementation of consolidated risk-based capital (RBC) regime in order to strengthen prudential supervision of insurance groups. 8 The FSC/FSS believe that the new consolidated RBC regime will contribute greatly to more effective group-wide risk management in the insurance sector, as it would help insurance companies better identify subsidiary risks and prevent the spread of contagion from a subsidiary to the entire insurance group. While a partial trial implementation of the new regime already began in August 2013, the FSC/FSS expect to proceed with full implementation some time in 2015 after necessary industry and market assessments. Finally, the FSC/FSS appreciate the IMF/World Bank’s recommendations and fully expect to utilize the assessment outcome as an opportunity to further improve and strengthen Korea’s insurance regulation and supervision. The authorities also look forward to a continuing dialogue with the IMF/World Bank in jointly seeking to improve the stability and effective supervision of the global financial services sector. 9 II. DETAILED PINCIPLE-BY-PRINCIPLE ASSESSMENT Table 4. KOREA: Detailed Assessment of Observance of the ICPs ICP 1 Objectives, Powers and Responsibilities of the Supervisor The authority (or authorities) responsible for insurance supervision and the objectives of insurance supervision are clearly defined. Description The FSC Act and the Insurance Business Act (IBA) allocate responsibility for insurance sector regulation and supervision to the FSC and FSS. Article 17 of the FSC Act allocates responsibilities to the FSC (developing policy) and the FSS (overseeing supervision and inspections within these policies). The FSC Act defines the objectives of supervision including with respect to insurance. The IBA, in Article 4 1, notes that the purpose includes the protection of policyholders , the sound management of insurance companies and the balanced development of the national economy. The FSC Act provides the authorities with broad powers to issue and enforce rules by administrative means and to take action promptly to protect the interests of policyholders. The FSC is required under the FSC Act to identify conflicts and improvements to the supervisory arrangements and does so. In most cases, after appropriate and defined (40 day) consultation, proposals are submitted for adoption and the experience is that they are adopted promptly. In a limited number of cases, one involving difficulties that were raised regarding privacy of information transfer and another on the treatment of a proposal under legal requirements administered by other agencies, the solution was not adopted and alternative solutions are being advanced by other authorities. Both are relatively recent and are being progressed under discussion. Assessment Observed Comments The requirements in Korea meet the standards of this core principle. ICP 2 Supervisor The supervisor, in the exercise of its functions and powers:  is operationally independent, accountable and transparent;  protects confidential information;  has appropriate legal protection;  has adequate resources; and  meets high professional standards. Description The supervision and oversight of the financial sector rests with the FSC and the FSS. The FSC deliberates on policy matters relating to inspection and supervision of financial institutions and has the authority to issue and revoke licenses. It also drafts legislation relating to the financial sector and submits it to the national assembly. The FSS acts, in general, to carry out day to day policies of the FSC with primary responsibility for supervision and examination of regulated financial institutions and as a mediator of disputes between financial institutions and their clients. In 2008, the Financial Policy Bureau of the Ministry was integrated into the FSC with the consequence that the FSC was elevated in status to that of a Ministry and the 4 The IAIS ICPs refer to policyholders to include other beneficiaries and the same intent is adopted in this report. 10 Chairman to the level of Minister. Internal Governance The FSC is governed by nine commissioners including the Chairman and the Vice Chairman. The Chairman is appointed by the President of Korea on the recommendation of the Prime Minister. The Vice Chair and two standing commissioners are also appointed by the President on the recommendation of the FSC Chairman. The remaining five non-standing commissioners are appointed ex- officio (Vice Minister of the MOSF, Deputy Governor of the BoK, Governor of the FSS, and President of the KDIC) except for one industry representative who is recommended by the Chamber of Commerce. The FSS is headed by a Governor and up to four Senior Deputy Governors, nine deputy governors, and a Chief Executive Auditor. The Governor and the Chief Executive Auditor are appointed by the President on the recommendation of the Chairman of the FSC. The Governor recommends candidates for Senior Deputy Governor to the FSC and directly appoints the deputy governors. The governance of the FSS is set out in articles 3 to 22 and 29 to 36 of the FSC Act. All of the above officers of the FSC and FSS are appointed for three year terms. Appointment and Dismissal There are explicit procedures for appointment and dismissal in the FSC Act articles 4, 10, 29 and 32. Dismissal procedures include causes such as bankruptcy, incapacity, imprisonment, or violation of the FSC Act. In practice, not all heads of the FSC have not served their full 3 year term as the elevation to ministry status for the FSC has raised the possibility that the Chairman’s tenure is now also influenced by the service at the discretion of the President of Korea. The FSS leadership was less stable in the early years of establishment but more recent Governors and other’s in leadership positions have tended to serve their full terms uninterrupted. Institutional Relationships The governance structure is the main basis for institutional relationships within Korea although this is supplemented by requirements governing exchange of information set out in the FSC Act. Explicit procedures are included in the FSC Act covering exchange and supervisory work that includes the BoK or the KDIC, and exchange of information with the MOSF. The operational details of exchanges between the BoK and the KIDC are also elaborated in MoUs between the parties. The defined roles and delegations between the FSC and FSS are defined in considerable detail. Arrangements to interact with the prosecutorial and judicial authorities are well established. The governor of the FSS also has an explicit open power to request the assistance of administrative or other agencies as is felt necessary to carry out the duties of the FSS (Article 67). Independence and Funding Officers of the FSC are barred from holding any political position or engaging in any commercial activity during their tenure. The FSS budget is approved by the FSC. The FSC budget is approved as part of the national budget by the National Assembly. As the FSC is part of the public service, it is subject to personnel-related guidance from the Ministry of Public Administration and Security. The FSS is not subject to personal policies of the Ministry of Public Administration but, instead, to the policies prescribed by the FSC and its own FSS leadership. 11 Transparency of Requirements and Procedures The FSS and FSC have internal governance procedures that are documented and generally followed. Internal audit is in place that reviews observance of supervisory practices. Supervisory decision making is also governed by the FSC Act, and detailed in extensive subsidiary rules starting with the “Enforcement Decree” and then Regulations and guidance. The FSS has also published extensive details of its processes, particularly those relating to their supervisory rating approach, the “Risk Assessment Application System” (RAAS) as it applies to insurers. These legal instruments and subsidiary requirements are all publicly available on the FSS website and in hard copy. Review of Requirements and Procedures The regulatory requirements have been actively reviewed to maintain them against international standards and local market conditions in recent times. Public consultation is the normal practice and the attention of key stakeholders is drawn to open consultations through official letters and public announcements and on the website. Reviews are required under the Administrative Procedures Act articles 41 to 47. Information on the Insurance Sector and the Supervisor Aside from the publications already mentioned, the FSS produces an annual report in Korean and English. This report provides both quantitative and qualitative information on the conduct of supervision, and some industry performance statistics. Additional insurance sector statistics are published by the Life Insurance Association and the General Insurance Association respectively as well as financial information required to be published by insurers directly. Appeal Against Supervisory Decisions Decisions of the FSS can, in cases where there is uncertainty raised about FSC instruments and policies, be reviewed by the FSC. It is also possible to appeal individual decisions to be subject to an administrative trial under the court system under Article 70 of the FSC Act if they feel that their rights and interests are infringed by unlawful or unreasonable actions by the authorities. Confidentiality Confidentiality requirements are imposed on FSC and FSS members and staff both during and after their terms of office. The FSC obligation comes from Article 60 of the State Public Officials Act and the FSS obligation is imposed by article 35 of the FSC Act. Breaches are punishable by either imprisonment for up to three years of a fine of up to KRW 20 million. Legal Protection Officials can be liable for damages only in the event that the cause was intentional or negligent (Article 2 of the State Compensation Act). Under FSS staff regulations, protection is available for FSS staff however; decisions to provide legal funding are made on a case by case basis. Supervisory Resources The FSS is funded primarily by fees on financial institutions and market participants and an allocation from the BoK. The budget for the FSS is approved each year by 12 the FSC. The FSC budget is approved by the national assembly. The budget can be used flexibly and it is possible to request adjustments in response to supervisory needs in changed circumstances. The FSC and the FSS are both well-resourced generally and with respect to insurance supervision. Integrity and Professionalism FSC and FSS staffs have been given extensive opportunities for training and development and have benefited very substantially from engagement in international activities. The Public Service Ethics Act and FSS bylaws set high standards of integrity and professionalism for FSC and FSS staffs respectively. Outside Experts The FSS can secure outside experts who would be subject to the same obligations of integrity and professionalism as FSS staff, although this would be achieved through the contractual arrangements with the experts. The FSS can appoint external experts to conduct emergency reviews at short notice. Assessment Largely observed Comments Measures to enhance the political independence of the governing bodies could be considered. Legal protection arrangements should be strengthened further. ICP 3 Information Exchange and Confidentiality Requirements The supervisor exchanges information with other relevant supervisors and authorities subject to confidentiality, purpose and use requirements. Description Article 112 of the IBA provides for the collection of information from insurers and from substantial shareholders. The FSS can and does exchange information without conditions under its international cooperation powers (Article 17-7 of the FSC Act). Requests are assessed against the relevant policies including the existence of a supervisory purpose and the appropriate confidentiality protections in receiving entities and ask that the recipient agree to seek the prior consent of the FSS before passing information to others. Reciprocity is not required but is a consideration and the existence of formal agreements is not a precondition. Domestic exchange of information is governed by MoUs with the BoK and the KIDC. Regarding taking their own initiative, the FSS tends not to exchange confidential information on its own initiative but often shares public information with others for their information. Legally, if it felt it was in the interests of cooperation, the FSS could make a self-motivated and initiated disclosure. The authorities do get requests mostly related to fitness and propriety due diligence and approvals of individuals. The international cooperation department has a team that acts as a focal point to handle requests coordinating with the line departments. Assessment Observed Comments 13 ICP 4 Licensing A legal entity which intends to engage in insurance activities must be licensed before it can operate within a jurisdiction. The requirements and procedures for licensing must be clear, objective and public, and be consistently applied. Description Licenses are issued for insurers that can be branches or locally incorporated entities. It is legally possible to establish a mutual insurer but, at the time of the assessment, there were no insurers that had a mutual structure. Licenses authorize insurers to do life or non-life insurance and certain special single line companies. Reinsurance is provided with a non-life license although they are permitted to operate as composite reinsurers. Insurance cannot be conducted without a license. The power to issue licenses that are conditional or restricted is provided in the IBA in articles 4 and 7. The procedures for licensing are set out in Article 6, and further elaborated including in the published FSS Handbook. Under article 9 of the Enforcement Decree of the IBA, decisions on licenses are made within a two month period and advised to the applicant. The IBA Regulations Articles 2-4 require notification of the reasons for the decision regarding denied licenses. In practice, the FSC/FSS tend to issue unconditional licenses except regarding restrictions to specific classes of insurance. As part of the license process, the FSS assesses requirements for capital, adequate manpower, systems and facilities, a sound and feasible business plan, and investors who are financially able to support the insurer to the extent called for. Board members, significant owners (defined in Article 2 of the IBA with a 10% threshold, and connected parties) and Senior management (broadly defined as those who constitute the executive management regardless of title) are required to be fit and proper. Key persons in control functions are not definitively set out in the IBA. Rather, they would be assessed only if they were appointed to a position that would be considered to be "senior management" Minimum capital requirements in absolute terms are prescribed on a class of business basis varying from KRW 5 billion for engineering, and title insurance to KRW 30 billion for credit guarantee insurance and reinsurance. These individual rd class limits can be reduced to 2/3 of the prescribed level if insurers envisage writing 90 percent or more of their business through direct mail, telephone or electronic distribution. Foreign branches are also subject to a minimum of KRW 3 billion. The FSC/FSS consult with foreign supervisors when entities or key persons are proposed from foreign jurisdictions. Cross border services provision is not permitted. Assessment Observed Comments ICP 5 Suitability of Persons The supervisor requires Board Members, Senior Management, Key Persons in Control Functions and Significant Owners of an insurer to be and remain suitable to fulfil their respective roles. Description Articles 6, 13, 15 and 17 of the IBA define the suitability requirements for large shareholders, executives, outside directors, and compliance officers. The assessment is substantially against formal qualification criteria including criminal records, formal qualifications, compliance based integrity measures, and experience in technical cases. The financial competence of significant shareholders is also a criterion in those cases. Significant shareholdings are defined to exceed 10% or to have a similar impact jointly or through related parties or through effective control so 14 is able to be broadly enforced. In the event of breaches of suitability, once approved, bans for 2 years are legislated in violation of the IBA (and for 5 years if a criminal record). Significant owners can be required not to exercise their rights or to divest, under Article 6 of the IBA. There is a guideline addressing commitment for independent board members recommending that they do not hold positions at more than three companies. Fitness and propriety is reviewed through licensing, on appointment and as part of the ongoing supervisory inspections. There is no legal requirement that a person who becomes other than fit and proper is reported to the FSS, instead a reliance is on the insurer taking the necessary steps to remove the person from the position. There is no whistle blowing situation provided. Collective competence is not comprehensively assessed under the law, for boards, however it is addressed as part of the composition for requirements for independent board members and, in the case of larger insurers, the composition of the required compliance committee. However, the FSS does review the effective operation of the board including the appropriateness of the balance of skills and experience of the board collectively as part of their supervisory review in practice. The FSS also does not tend to consider the capacity of competent persons who may have multiple, and possibly too many, commitments thus leading to them being over- extended. The FSS exchanges information with other authorities to check the suitability of relevant people. Assessment Largely observed Comments The authorities should extend oversight to key persons in control functions regardless of their formal management position, and should consider more formal criteria that relate to collective adequacy of boards and the possibility that any person (not just those specified) might be over-extended. The obligation on insurers to self-monitor and report suitability could be made more formal. ICP 6 Changes in Control and Portfolio Transfers Supervisory approval is required for proposals to acquire significant ownership or an interest in an insurer that results in that person (legal or natural), directly or indirectly, alone or with an associate, exercising control over the insurer. The same applies to portfolio transfers or mergers of insurers. Description Prior approval is required under article 6 of the IBA to become a significant shareholder (at or in excess of 10%, or effective equivalents that are indirect but present similar effective control including cases involving affiliated owners or where control is deemed to be the case due to effective management influence as defined in Article 2 of the IBA). The only exception to the requirement for prior approval is if the new control is as a result of an enforcement order. The composition of ownership and control is monitored by insurers and reported to the FSS. Increases of 1% (up or down) in holdings or newly included affiliates are reportable. The Act on the Structural Improvement of the Financial Industry (ASIFI Act) also has reporting and approval requirements at 25% and 33% thresholds. Given that all shareholders are approved at the threshold level against the same criteria whether they are at 10% or 100% then the FSS considers that increases do not tend to raise concerns in practice. Article 6 of the IBA sets out the criteria for the assessment and approval and these are substantially the same as are applied to new licenses, although new licenses may require additional information depending on the precise nature of the shareholder role in the new enterprise. Article 11 of the Enforcement Decree includes obligations for both financial and non-financial resources on those applying 15 to be approved as significant owners. In the event that an incremental situation, or an external development, gives rise to a situation of concern even though the significant shareholder met the requirements and was approved at the lower level, the FSS can intervene under a range of indirect powers although it does not have a direct power to require a change of control or revoke a prior approval but it can make recommendations. Portfolio mergers are subject to approval by the FSC under articles 137 to 152 of the IBA. As there are no mutual insurers currently licensed, the legislative requirements for demutualization are not a material issue. Assessment Observed Comments ICP 7 Corporate Governance The supervisor requires insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of the insurer’s business and adequately recognizes and protect s the interests of policyholders. Description The commercial act provides the basis for corporate governance supplemented by specificities in the IBA. Insurers are required to establish a corporate governance and internal control framework that is suitable for their business (article 17 of the IBA). When any insurer intends to establish or amend its internal control standards, it requires board resolution (article 22 of the Enforcement Decree of the IBA). The minimum requirements include a series of minimum compliance requirements, (50% outside directors), including audit committee (2/3rds outside directors), compliance officer, and majority of independent directors. Etc. Need to cover specific areas in the insurer plan (asset management etc) leaving the company to develop an appropriate approach. Independent directors, defined as “outside directors”, and are required under the IBA to not be managers or executives and not shareholders and cannot have business transactions with the company (such as audit or legal services). A nominations “recommendation” committee made up of 2/3rds existing outside directors has to identify candidates. Executives from upstream companies and outside directors of parent companies could possibly be “outsiders” but the FSS advise that there are no such cases at the time of the assessment. The board is also required to oversee the system through the audit committee responsibilities and that of the mandatory compliance officer. The responsibilities and obligations of the board of directors regarding integrity, due care and diligence, and other good practices are prescribed in the Commercial Act. Sound risk management elements that are needed are defined in articles 7-5, 7-5-2, 7-6, 7-7, and 7-8 of the BA Regulation requiring attention be taken care of defined risk categories, a risk assessment, and to reflect this assessment in business and capital plans. Limits are to be established under these categories and enforced. For larger insurers (over KRW 300 billion assets) a risk management committee is required (effectively all insurance companies in the current market). Internal control systems are subject to inspection and recommendations might be suggested for improvement. These inspections draw upon the experience of assessors and observed best practices at other entities when they form an opinion of the risk management and internal control systems of the insurer. When there are failures of governance or internal control systems, the 16 consequences of the corporate governance laws are relevant but also the FSS can use the powers of a breach of the IBA as the controls are required under Article 17. The FSC/FSS can impose constraints, bans, and business license conditions. Recommendations can be effectively compulsory when they relate to a particular article of the IBA. When there is no particular basis in the IBA, the FSS/FSC can use a public guidance and best practice approach. Changes in governance are required to be reported to the FSC/FSS and publicly. The FSC/FSS introduced a “Best Practices for Insurers’ Remuneration Policies” guideline in January 2010 to implement the FSB recommendations on remuneration practices (banks and securities have their own sister initiatives). This is a recommendation which is enforced through supervisory actions. Assessment Observed Comments ICP 8 Risk Management and Internal Controls The supervisor requires an insurer to have, as part of its overall corporate governance framework, effective systems of risk management and internal controls, including effective functions for risk management, compliance, actuarial matters, and internal audit. Description Article 17 of the IBA requires insurers to have an effective risk management and internal control system overseen by a “compliance officer” appointed by and reporting to the board. The compliance officer’s appointment, independence of management, and resourcing are further elaborated by requirements in Article 17 including prohibitions on dual responsibilities and powers to seek and obtain information from operations executives of the insurer. The criteria also support the adequacy and effectiveness of the control functions by requiring insurers to have the independent oversight of the audit committee for the compliance officer and that the officer is subject to fitness and propriety requirements including experience. Insurers are required to have an effective risk management function (Article 7-6 of the IBA Regulation) and this is subject to inspection and verification. Actuaries are required under article 181 of the IBA. Each company has a chief actuary subject to fitness and propriety requirements. They have to examine and report to the company and the FSS regarding provisions and pricing. The Article 3-2 of the Regulation on Business Delegation of Financial Institutions (under the FSC Act) obliges institutions to have appropriate standards and to comply with them regarding delegated activities. These standards are further elaborated in the Appendix 2 of the regulation. In practice, insurers tend to have internal audit functions and very developed systems for internal control and actuarial oversight but their risk management systems are more consistent with a compliance based approach. ERM is a developing process in Korean insurers. They have implemented risk management requirements but are still maturing in terms of fully internalising risk management concepts. The RBC implementation provided a strong impetus to develop risk management and it is welcome that KIDI and others are helping with capacity development. The RAAS also lays out specific standards and supplements the guidance in the law and regulations. Risk management and internal controls are assessed through onsite inspection and offsite analysis, with the consequence that shortcomings flow through to insurer supervisory ratings. 17 Assessment Largely Observed Comments The approach to regulation, particularly regarding internal controls, actuarial obligations, and compliance, is fully observed. Risk management is one area where observance will be fully achieved as industry capacity improves and internalizes risk management approaches throughout the business operations. ICP 9 Supervisory Review and Reporting The supervisor has an integrated, risk-based system of supervision that uses both off-site monitoring and onsite inspections to examine the business of each insurer, evaluate its condition, the quality and effectiveness of its Board and Senior Management and compliance with legislation and requirements. The supervisor obtains the necessary supervisory information to conduct effective supervision of insurers and evaluate the insurance market. Description Risk-based Supervision Approach The FSS FSC approach to supervision is building a risk based approach on what has been a solid compliance based approach. Insurers are assessed using information of a quantitative and qualitative nature as well as input from the ongoing supervisory process in a RAAS rating based approach. Reporting to the FSS occurs on an annual and a monthly basis. Article 118 of the IBA requires insurers to submit statements and business reports. Articles 6-2 and 6- 8 of the IBA Regulation, and Article 4-1 of the Detailed Regulations define the scope, content and frequency of reports and information in increasing detail. These regulations also require insurers to report off-balance sheet exposures, outsourced functions and material changes. Article 133 of the IBA authorizes the FSC to order insurers to submit the list of current shareholders, report on their business and submit materials in connection with the performance of items raised in inspections. Articles 133-1 and 133-2 facilitate ad hoc requests either directed at on or off site requirements. Article 2 of the Act on External Audit of Stock Companies requires external audit. Fines for inaccurate or late information of up to KRW 50 million can be imposed under Article 209 of the IBA. The FSC FSS continuously reviews reporting requirements. These were last amended in September 2012. Offsite Surveillance and Analysis The FSS RAAS rating system operates along the lines of CAMEL systems. The risk assessment system covers a range of categories of risks and ratings on a 1 to 5 scale including quantitative and qualitative elements, Ratings are assigned by guided and judgmental criteria and then aggregated to a single score using a weighted average approach with weights selected based on the importance of relevant risks in different business sectors (life versus non-life). Additionally, there are some sub tests that might apply in cases of subgroups of scores that inform the consequent intervention. Ratings are shared with insurers. The RAAS system is documented in a public document. There is evidence of proportionality in the RAAS system due to different treatments in the level of quality expected between smaller simpler insurers and larger more complex insurers. Onsite Inspections Article 133 of the IBA provides the FSS powers to conduct on-site inspections and gather information deemed necessary to perform its duties. According to Article 8-2 18 of the Regulations on Examination and Sanctions Against Financial Institutions, a prior written notice of examination is not required in prescribed cases. The FSS operates an inspection program that is organised into two departments (life and non-life). On average general inspections of a full nature for three or four companies per year. 27 general insurance targeted inspections were done last year for non-life. This year, 13 are planned for non-life. Inspections can be general or targeted and can extend to service providers. The FSS has an internal manual that provides guidance to staff on the procedures, supplementing the legal requirements set out in regulations. Inspections include verification of returns and reports, supplementing the FSS engagement with external auditors on the quality of financial reports. The FSS issues inspection reports and recommended corrective actions to insurers. The number of inspections conducted per year varies reflecting RAAS ratings but it is usual for all insurers to get either a general or targeted inspection each year to 18 months. Assessment Observed Comments ICP 10 Preventive and Corrective Measures The supervisor takes preventive and corrective measures that are timely, suitable and necessary to achieve the objectives of insurance supervision. Description Article 200 of the IBA prohibits the operation of an insurance business without a license required under article 4. A person who violates this requirement can be penalized by a fine of up to 30 million KRW or imprisonment of up to five years. There is a progressive escalation of measures provided for under the IBA article 131 and 123 and the Regulation articles 7-16, to 7-22. The steps and the numbers of actions taken with respect to the insurance sector are as follows: 2011 2012 Onsite action 81 101 Management caution 10 25 Improvement needed 33 34 Warning 31 24 Request for action 2 26 Disciplinary action 73 81 Other 0 0 Source: FSS Annual Reports Note: 2010 figures are not shown as they are not categorized in a similar manner. The insurance supervisory function also sanctions or takes preventative measures that are categorized as covering asset management, accounting, internal control, or IT issues and are not shown in the above table but, in aggregate, are of a similar magnitude. Under article 7-20 of the IBA Regulations, insurers that have corrective actions have to develop preventative plans that need to be approved by the FSC. Reports and sanctions are discussed with the CEO and boards. The FSS generally sends reports from inspections, and sanctions or requests for action, to the CEO. They do meet boards annually. They also meet as part of the onsite inspections with management and boards, internal audit. The board has to be informed of outcomes 19 from inspections and sanctions according to the IBA Regulations. The FSS and FSC have decision making lines and delegations in place governing the levels of authority for taking actions in line with the powers under the law. Onsite inspection reports form the basis for these actions. Reports are reviewed internally to ensure the decisions are appropriate including by a “restriction review office” and then the “restriction review committee” (8 of the 9 members are independent of the FSS to add to the transparency). Where it is appropriate, a 2 week notice period is provided to the insurer. Fines also go through this process. Appeals of decisions for corrective action and preventative measures are permitted through administrative legal actions. Assessment Observed Comments ICP 11 Enforcement The supervisor enforces corrective action and, where needed, imposes sanctions based on clear and objective criteria that are publicly disclosed. Description As noted in the description for ICP 10, there is a progressive structure for intervention aimed at corrective action. Actions are taken using these formal processes as a matter of course. There is a wide range of corrective actions specified in regulations and include directions that could restrict expenses or the payment of dividends so as to maintain capital. Rectification plans are agreed by the FSC and followed up by progress reports and completion reports made to the FSS to verify that the plan is being implemented. Plans that prove to be insufficient to rectify the concerns can be amended at any time. FSS can fine or remove individuals for 2 or 5 years. The FSS can replace or suspend senior officers from their duties or replace them with a custodian to act in the position. Under the Structural Improvement of the Financial Industry Act, the FSC can appoint managers to take over the oversight of an insurer. The IBA provides for issuing an order for cessation of business, to freeze assets or payments, or to take another action under a general directions power in article 131-2. Articles 196, 197, 204, 209 of the IBA provide the legal basis for imposing penalties and fines. Article 209 states that an insurer may be punished by a fine not exceeding KRW 50 million where it fails to submit the financial statement by the deadline or submits a false statement. Fines are paid to the FSC. The cooperation of other authorities, particularly the prosecutors in this case, is supported by Article 65 and 67 of the FSC Act where this cooperation can be requested by the head of the FSC. The FSC is obligated to act with objectivity and fairness under the Framework Act on Administrative Regulations. This has been further enhanced by its own actions that set out the procedures in a transparent way including internal review and, ultimately, decisions made in a review committee's deliberation. Article 34 of the Regulations on Examination and Sanctions Against Financial Institutions makes transparent the existence of this process and the review committee. Assessment Observed Comments 20 ICP 12 Winding-up and Exit from the Market The legislation defines a range of options for the exit of insurance legal entities from the market. It defines insolvency and establishes the criteria and procedure for dealing with insolvency of insurance legal entities. In the event of winding-up proceedings of insurance legal entities, the legal framework gives priority to the protection of policyholders and aims at minimizing disruption to provision of benefits to policyholders. Description The procedures for wind-up are set out in the act on the structural improvement of the financial industry and the IBA and associated regulations. Articles 7-17, 7-18 and 7-19 of the regulation defines when an insurer has to put in place corrective measures required by the FSC/FSS. An insurer with a solvency ratio less 100%, or a RAAC rating below 4 both provide sufficient triggers to suspend business. The FSS can instruct the insurer to wind-up by order when it breaches such a trigger. Involuntary wind-up is managed by appointing a manager of the wind-up process from the FSS. In practice, including in a material number of cases that followed the 97-98 financial crisis, the FSS has adopted the approach of ordering the transfer of policy obligations to other insurers to ensure continuity of provision of benefits to policyholders. Policyholder protection in the event of wind-up is supported by the insurance component of the KDIC. The KDIC covers insurance policyholders and beneficiaries with a limit up to KRW 50 million. Assessment Observed Comments ICP 13 Reinsurance and Other Forms of Risk Transfer The supervisor sets standards for the use of reinsurance and other forms of risk transfer, ensuring that insurers adequately control and transparently report their risk transfer programmes. The supervisor takes into account the nature of reinsurance business when supervising reinsurers based in its jurisdiction. Description The FSS has provided a document “Best Practices for the Reinsurance Management of Insurance Companies” that establishes requirements against which insurers are assessed. The document requires an insurance operating strategy and procedures to execute the strategy, and associated policy statements and internal procedures. The supervisor is informed of both the overall policies and specific transactions for review. Article 7-12 of the IBA Regulation requires insurers to submit details of reinsurance contracts and Article 4-1 of the “Detailed Regulations” defines required transaction reports. The supervisor takes into account the nature of supervision of reinsurers and other counterparties, including any supervisory recognition arrangements in place. The requirements include the need for the treatment of the reinsurance asset in the cedant accounts and that the reinsurance shall accumulate liability reserves for the portions reinsured, and identifies conditions for acceptance of these assets. If the insurer accepting reinsurance fails to satisfy the criteria for financial soundness, insurers must reduce the valuation of the assets (Article 63 of the IBA Enforcement Decree). The Best Practices for the Reinsurance Management of Insurance Companies, requires secure reinsurance contract documents before reinsurance contracts are 21 fully confirmed for recognition purposes. Management of liquidity risk related to reinsurance is assessed by the FSS quite actively and it is embedded in the internal examination manual. Risk transfer to capital markets is not allowed at the time of the assessment as the law is silent and insurers have to gain approvals and it is not currently a listed activity that an insurer can conduct. Reinsurance requirements are included in the normal inspection and investigation processes and the FSS recommends changes if needed and takes into account a test of proportionality in doing so. Assessment Observed Comments ICP 14 Valuation The supervisor establishes requirements for the valuation of assets and liabilities for solvency purposes. Description Korea has adopted IFRS. This addresses recognition, derecognition and measurement of assets and liabilities. Articles 6-1 to 6-3, 6-11 and 6-12 of the IBA Regulation further addresses recognition and measurement of assets and liabilities for solvency purposes. The valuation of liabilities was historically based on an historic cost approach using policy parameters established at the point of sale. This approach has been used in a number of countries to generate consistent emergence of profit matching cost based asset valuations however, Korea no longer uses cost based assets having moved to IFRS. Historic cost elements remain relevant for surrender value coverage purposes so have been maintained as part of the system. However, the historic cost has been maintained for insurance liabilities, supplemented by a liability adequacy test. Given the fact that interest rates have fallen in particular, Korean insurers now also calculate a fair value assessment of the adequacy of the liability valuation (the “Liability Adequacy Test”) that requires the th use of the current estimate using realistic reserves and a 65 percentile and to adopt the greater result. In this way, they assess the adequacy of the liability valuation. th Where the 65 percentile does produce an additional liability, it is shown separately as an addition to the historic cost. Discount rates are applied. Discount rates and the method to determine the percentile are determined under guidance in the Enforcement Decree IBA. The Liability Adequacy Test and the balance of the IFRS calculations take a risk adjusted and market consistent approach but without adjustment for the insurers own credit standing. The extent that assets and liabilities are “consistent” is a matter of interpretation given the calculation method includes an element of the historic cost approach but, with the discounted value overlay, is consistent for the purposes of solvency assessment. The valuations are, principally as a result of the IFRS conversion, decision useful, transparent and reliable. Technical reserves need to reflect options and guarantees, and the accumulation of guarantee reserves allow for guaranteed minimum benefits such as guaranteed minimum accumulation, death or withdrawal benefits. Assessment Largely Observed 22 Comments The continued use of historic cost as a part of the valuation system will reduce in relevance over time but does, in the interim period, reduce the transparency and consistency of the approach somewhat. ICP 15 Investment The supervisor establishes requirements for solvency purposes on the investment activities of insurers in order to address the risks faced by insurers. Description The IBA prescribes principles for investment, enumerates prohibited investments and sets investment limitations (Articles 104-106). Investment regulations are codified in Article 7-1 of the IBA Regulation, and are elaborated in informative documents such as the published FSS handbook. Regulated investment limits are hard limits – that is, it is not possible to hold assets in excess of the limits. These requirements include the usual issues covered regarding investments that are made by insurance legal entities that are relevant for the control of insurance group level investments. Investment policies have to address the appropriateness of assets in terms of security, stability, return and liquidity and this is reinforced by the statutory limits on assets of lower liquidity such as real estate and unlisted lending. To encourage investments that are appropriate to the nature of the liabilities, the RBC system also addresses mismatch and imposes additional capital requirements consistent with the extent of mismatch. The RAAS and on site inspection processes review the quality of investment management including the capacity of insurers to manage the risks associated with the assets that it selects. These guidelines in the inspection processes give particular attention to credit risk, risk management and modelling capacity, and the appropriateness of the insurers own internal limit systems. As a result, the FSS and FSC arrangements represent a blend of a fairly compliance oriented set of limits in the rules but the RAAS takes a more risk based approach to supervision given that it goes well beyond the legal limits to assessing the investment policy and the derived internal limits and controls. At the same time, insurers still evidence a maturing risk approach as their investment initiatives have been enhanced by the RBC requirements than a more generic risk assessment. Although, this is a positive development as the purchase of longer term bonds has reduced both the exposure to negative spreads and to duration mismatches. Assessment Observed Comments Recommendation, noting that larger insurers tend to have more advanced risk management processes and their limit setting approach tends to be more robust, reinforce shift to more risk based approach within the limit structure. ICP 16 Enterprise Risk Management for Solvency Purposes The supervisor establishes enterprise risk management requirements for solvency purposes that require insurers to address all relevant and material risks. Description With the exception of ORSA related requirements, which are expected to be introduced in the near future, most risk management requirements are in place in regulation. Insurers demonstrate that they are developing but have not yet fully institutionalised ERM approaches into their business operations. Insurers are required to establish a risk management committee, risk management policies, tolerance limits (particularly on the asset side), and a risk management function responsible for the identification and management of risk (Article 7-6 of the 23 IBA Regulation). More detailed requirements for ERM are planned to be included to help operationalize these requirements and the FSS FSC is (rightly) taking a progressive approach that will help insurers to properly incorporate risk management into their business methods more fully, in contrast to a less desirable compliance approach. Although the IBA Regulations (Article 7-7) sets requirements regarding the assessment and management of risk, there is no specific attention given to the necessary documentation of ERM at a detailed level at this stage. Article 7-6 of the regulation under the IBA requires a risk management committee and risk management operation within the insurers. Procedures and practices have to be documented (Article 7-7) although the specific content of the documentation is expressed in general terms and is planned to be elaborated in more detail (for example the which risks to cover, how to address certain situations in line with the capital regime requirements etc). The new RBC regime, along with requirements for Asset-Liability management policies, has brought a useful focus to investment and liability risks but product development and pricing is not yet fully integrated into the risk management process in all cases and there is no specific regulatory requirement for such inclusion. Insurers are working on the integration of their risk management systems, currently requiring risk tolerance in terms of limit development for example, to a broader risk tolerance capacity consistent with the nature, scale and complexity of the insurers. The same can be said for a more formal requirement to address the need for the ERM system to be responsive to changes in risk profiles or to incorporate the structured processes of feedback loops, data quality considerations or incorporation in management processes although many of these issues are addressed to an extent in the insurance sector by other means. In terms of having a risk tolerance and capital policy aligned to business strategies and plans, insurers are required to have such an approach in broad terms under article 7-7 of the regulation but their ability to make more explicit linkages is not uniform across the sector. The KIDI is also assisting the sector to develop its risk management capacity toward a more complete ERM approach. At present, there are no ORSA requirements in Korean insurance regulation, but FSC/FSS plans to introduce ORSA requirements during 2013. Through the RAAS, the FSC FSS evaluates the management capacity and functions of insurers and takes corrective actions as needed. Assessment Largely observed Comments The FSS and FSC are developing requirements to introduce an ORSA system for insurers based on some guidelines that are under discussion that should be implemented in 2013. It is also planning to have detailed requirements added to regulations for ERM. There is a good deal of potential detail that can be implemented as ERM capacity develops in Korean insurers and the approach of doing so of having a guideline would be good. The rating of LO is justified given the successful implementation of major reforms in a timely manner in the Korean market. ICP 17 Capital Adequacy The supervisor establishes capital adequacy requirements for solvency purposes so that insurers can absorb significant unforeseen losses and to provide for degrees of supervisory intervention. 24 Description A “North American” risk based capital regime was introduced in 2009 replacing the previous “Solvency I” type system. Unlike the US system, minimum requirements have to be observed at a minimum of a 100 percent coverage ratio below which compulsory intervention is envisaged in contrast to the US 50% level and insurers also have a widespread view, promoted by supervisory expectations, that a buffer level should be maintained more consistent with a coverage ratio of 150%. Degrees of intervention by the FSC are determined according to solvency levels as well as being informed by the RAAS system that includes RBC coverage triggers. Articles 7-17 to 7-19 of the IBA Regulation specifies control levels relating to the coverage ratios including the need for the strongest intervention below 100%, “requests for improvement” between 100% and 150% coverage ratios and “Recommendations” between 150% and 200%. Companies meet the requirements comfortably as a result of capital injections and retained earnings. Life insurers have a coverage ratio of 311%, non-life insurers have 299% coverage and reinsurers have 210% coverage. The parameters were originally established at the 95% VaR level and this has been adjusted to 99% with a phase in period. The current regime in Korea does not allow internal models to be used for capital purposes, although such a concept is being considered. The regime, based on IFRS consistent statements as discussed under ICP 14 above, uses a total balance sheet approach and, to a considerable extent, recognizes the interdependence between assets, liabilities, regulatory capital requirements and capital resources and requires that risks are appropriately recognized however the treatment of some historic cost valuations means that this is less than fully transparent. The Regulation on the Supervision of Financial Holding Companies envisages requirements for capital adequacy of groups. A Task Force is drafting a group-wide solvency regime at the time of the assessment, expected to be finalized in 2013. The capital requirements are well documented in regulations and supported by a publicly available handbook that explains both the rule and the background to its development. Assessment Largely Observed Comments The absence of a group capital requirement should be addressed. ICP 18 Intermediaries The supervisor sets and enforces requirements for the conduct of insurance intermediaries, to ensure that they conduct business in a professional and transparent manner. Description Insurance intermediaries are required to be licensed under articles 84, 87 and 89 of the IBA. Under article 136 of the IBA, intermediaries are subject to ongoing supervision including inspection and sanction powers. Given the numbers involved, the supervisory approach and techniques involve around 4000 agencies (that have the 477000 solicitors attached to them or solicitors can be attached directly to an insurance company), using inspections of larger agencies, a publicized call center that addresses complaints, and disclosure requirements. Requirements on the qualifications and experience of intermediaries and minimum training needs are in place. These include prohibitions on persons who have not completed proportionate training requirements in hours and content (examined with a defined pass level), as well as such issues as not having a criminal record. There is an experience based credit for the obligation to cover the training hours that can offset some of the training hours needed. 25 The FSS has a separate team covering intermediary supervision staffed by 5 supervisors, and two other inspection teams of a similar size. The associations also have inspection teams that look at particular topics in support of the supervisory approach. Annual planning includes consideration of specific areas for target and focus in the coming year. Funds provided to intermediaries are protected through, in the case of brokers, a bond placed by the broker with FSS (for KRW 100 million for individuals and KRW 300 million for corporations, although the FSS can specify an increase in cases of larger entities) (Article 37 of the Enforcement decree). Insurers are responsible for the actions of their agents in similar cases under the IBA Article 102. Assessment Observed Comments Whilst the FSS and the legal requirements are sufficient, the FSS might consider some more proactive and anticipatory approaches to ensure its presence in the area is given a higher profile. ICP 19 Conduct of Business The supervisor sets requirements for the conduct of the business of insurance to ensure customers are treated fairly, both before a contract is entered into and through to the point at which all obligations under a contract have been satisfied. Description In 2012, the FSS set up a Financial Consumer Protection Bureau to enhance its consumer protection function. It contains departments dedicated to consumer protection, dispute settlements, and financial education supplemented by an examination office. The FSS operates a “fair transaction process” to support consumer -orientated financial services provision. In addition to providing a public complaint service, the FSS oversees the roles and activities of other consumer protection organizations in the financial sector. Insurance intermediaries have obligations regarding “know your customer” (KYC), and a duty to explain the product that is being recommended and that such recommendations are suitable (they have a “best product” recommendation approach). In support of effective communication, the FSS FSC have published a “regulation on matters to be Observed in Solicitation Advertisements” that applies to both intermediaries and insurance companies. The requirements (under Article 7-45 of the Regulations) specify certain documents that have to be provided at certain points of the process such as when making the recommendation, signing the contract, and after the issue of the policy. Efforts to achieving the desired outcome for clients are enhanced by the prescribed disclosures and documents, as well as the obligations for ethical behavior and training. Additionally, regarding the risks arising from bancassurance, the FSS requires a distinction between bank and insurance products and applies a “25% rule” where banks cannot, with limited exceptions, make sales of insurance products for an individual insurer that exceeds 25% of total insurance sales for that bank. The FSS consumer complaint and mediation process includes access to a Financial Disputes Mediation Committee made up of over thirty experts from the FSS and the private sector. Assessment Observed Comments 26 ICP 20 Public Disclosure The supervisor requires insurers to disclose relevant, comprehensive and adequate information on a timely basis in order to give policyholders and market participants a clear view of their business activities, performance and financial position. This is expected to enhance market discipline and understanding of the risks to which an insurer is exposed and the manner in which those risks are managed. Description Article 124 of the IBA, Article 67 of the Enforcement decree, and article 7-44 of the IBA Regulations provide obligations on public disclosure of information that is comprehensive, relevant, adequate and timely. These requirements are also supplemented by disclosure guidelines developed by the industry associations. Information includes financial performance and balance sheet statistics in considerable detail and is supplemented by information on business plans, organisational structures and changes, performance by business line, risk exposure measures, capital requirements and adequacy, details of risk management methods and approaches, reinsurance practices and counterparty quality, governance, investment policies and asset valuation information. Triangle information is reported in the case of non-life insurers. Annual financial information is audited. The adoption of IFRS has been comprehensive ensuring considerable consistency across the sector and facilitating comparative analysis (noting however the specific treatment of insurance liability valuations noted in ICP 14). Article 118 of the IBA requires insurers to submit their financial reports within three months from the end of each financial year. However, in practice, reports are generally filed within two months of the end of the reporting period. Insurance company websites and industry association homepages carry the information required. Information is used by industry stakeholders including ratings agencies who produce reports discussing industry performance and trends and outlook. Assessment Observed Comments ICP 21 Countering Fraud in Insurance The supervisor requires that insurers and intermediaries take effective measures to deter, prevent, detect, report and remedy fraud in insurance. Description Article 3-3 of the IBA Regulations requires insurers to specifically establish controls against insurance fraud. This includes sales fraud controls checking client backgrounds and the number of policies and coverage a potential client already has. The regulations are more focused on the underwriting than the claims side. Sanctions against fraud in general are prescribed by the Criminal Act (Article 347), while the IBA addresses prejudicing insurance fraud investigations, and provides sanctions (Article 209). The FSS FSC has introduced a database in 2003 (the “Insurance Fraud Analysis System” IFAS). This system records all insurance contracts and claims data received monthly electronically. Cases of potential fraud are also highlighted to the FSS FSC by insurers. This database is subject to regular review including using suspect fraud cases and the development of fraud indexes, identifying individuals with a high propensity to commit fraud etc. The system runs identifying algorithms and reports for follow up. Additionally, broader reports are prepared on trends and specific issues that are made available to insurers including identification of fraud cases by product, type of case (eg false or exaggerated reporting or deliberate cause of a claim event), demographic information etc. The database is managed by a team in the FSS 27 (Investigation and analysis team – 5 members – various backgrounds – some IT, statistics, administrative, mathematics, and legal). The breadth of the database also facilitates the effective coverage of the insurance fraud oversight to insurance intermediaries and claims assessors and others in the insurance service delivery chain. Insurance fraud analysis is supplemented by insurer inspections and controls and feeds into the rating system of insurers. The database information, to the extent that it is individual records, has to be kept confidential within the FSS with the exception of prosecuting cases. Within the FSS, there are controls on the use of information limiting it to specific purposes and staff. Although the individual record data is not available outside the FSS, the aggregate trends are available but analysis of these records by industry and related stakeholders is not common. Fraud is investigated by the FSS that can report it to the police who then refer it to the prosecutor’s office or the police can initiate an investigation themselves. Insurance Investigation Committee has been established for cross agency coordination and development of policies to address fraud in insurance. It includes agencies such as the Ministry of Health and Welfare and others interested in the topic and is chaired by the FSC. The FSC is reviewing the possibility of adding the prosecutorial authorities and the consumer protection agencies as members of the investigation committee. Currently a different team function coordinates with police and prosecutors on the cases identified. There has been a case, as an example, where a fraud was suspected and the system was able to be used to identify and detect and prevent fraud involving the collaboration of multiple parties. Assessment Observed Comments Very impressive approach can be further leveraged to improve value to clients and efficiency in insurers. ICP 22 Anti-Money Laundering and Combating the Financing of Terrorism The supervisor requires insurers and intermediaries to take effective measures to combat money laundering and the financing of terrorism. In addition, and the supervisor takes effective measures to combat money laundering financing of terrorism. Description The Korean arrangements for AML CFT were subject to an assessment against the FATF requirements in October 2009, and is available on the FATF website. There is an FIU in the FSC that oversees AML and CFT. The Act on Reporting and Use of Certain Financial Transaction Information oversees AML and obliges reporting by insurers (and other entities) to the FIU. The Act on Prohibition of the Financing of Terrorism (APFT) establishes requirements oversee CFT. The requirements on insurers extend to cover all aspects of their business operations including functions conducted through intermediaries. Insurance companies do make suspicious transaction reports (STR) especially as reporting is of transactions – not just those in cash - albeit that insurer reports are not as voluminous as banks and securities companies. Regarding significant people (PEPs) the current regulations cover foreigners but not domestic PEPs but this regulation is being developed. The focus of the FIU has been substantially on banks but they are shifting to strengthen their focus on insurers. Korea has seen an insurance case that was subject to rejection by the insurer but reported and followed up to action an attempt to launder the proceeds of crime. 28 The FIU has its own inspection process and activity and also makes use of FSS capacities. The FSS has been developing specific inspection expertise in AML CFT matters. Assessment Largely Observed Comments The shortcomings in the AML regime, most specifically to address domestic politically exposed persons, should be addressed to achieve full observance. ICP 23 Group-wide Supervision The supervisor supervises insurers on a legal entity and group-wide basis. Description Group-wide Supervision is operated through indirect measures in the IBA covering such issues as related party transactions, capital treatment of certain assets, oversight and risk management requirements and inspections and this has been the historic approach. The Financial Holding Company Act, introduced in 2000, provides for some direct measures and an approval process for holding companies. All holding companies licensed under the FHCA are required to be non-operating. If a FHC has industrial capital (real sector activities linked) then it cannot own both an insurance company and a bank. The FHCA includes a flexible definition of groups so that this can be tailored to suit the range of possible cases that might need to be accommodated. Operating holding companies and intermediate holding companies, located in Korea are not legally permitted to be part of an FHC headed group. The consideration of risk elements remains largely indirect through limitations on certain activities and through individual entity supervision. These elements consider internal transactions between entities and cover upstream shareholders from licensed entities but not all potential risk concentrations and exposures are captured in the supervisory framework in place albeit that they are able to be monitored by the FSC FSS. The authorities have flexibility to determine regulatory and supervisory tools in the domestic context and elements of the Group Supervisory Framework are adjusted as the groups and risks develop. Application as a FHC is voluntary. When approved, this provides for group wide treatment of particular issues (including sharing customer information between entities which would present synergies), and governance such as the ability for directors to act in multiple entities in the group. Delegation of holding company activities to subsidiaries is facilitated. Simpler processes for some approvals are also available. There are 8 FHCs approved (one of which is predominantly an insurance group and the others are banking oriented groups with insurance entities within the group). These groups are very substantially domestic groups operating within Korea, with only very limited operations outside the country, but it can be expected that external business will grow making the groups more international in nature over time. The FSS can conduct oversight of and inspection of subsidiaries of insurance companies (subject to a 15% threshold to be considered a subsidiary). As a host supervisor for a number of insurers operating subsidiaries or branches in Korea, the FSS contributes to group supervision through cooperation and exchange of information on request and specifically seeks information when it is considering particular approvals that it has to provide. As home supervisor, the FSS can respond to requests from foreign supervisors when they get them but they tend not to receive many. For domestic groups, the FSS cooperates with the KDIC, (and the BoK for banks), and has cooperation with non-financial sector supervisory agencies as needed (eg ministry of health). 29 There is some participation in supervisory colleges where the FSS and FSC have host supervisory roles. Usefully, the authorities also have annual collaboration meetings with the NAIC to discuss market and supervisory policy developments. The CIRC and the FSS (first governor) hold cooperative exchange meetings. Assessment Partly Observed Comments The authorities should advance supervisory college considerations with respect to larger groups that are internationalising. The FSS should also request participation in colleges for foreign insurers utilising their international network to minimise costs. Consideration to strengthening the voluntary nature of the FHC laws with either stronger indirect oversight or compulsion would have merit. ICP 24 Macroprudential Surveillance and Insurance Supervision The supervisor identifies, monitors and analyses market and financial developments and other environmental factors that may impact insurers and insurance markets and uses this information in the supervision of individual insurers. Such tasks should, where appropriate, utilize information from, and insights gained by, other national authorities. Description As a consolidated supervisory agency, the FSC FSS obtains information on financial market developments across the sector. The MoU with the BoK allows access to information on macroeconomic factors. Beyond industry information, the macroprudential effort considers external linkages in the real economy, capital flows, foreign exchange activities, and other macroeconomic indicators. Macroprudential supervision for the overall financial sector including insurance, is performed by the Macroprudential Supervision Department at FSS. The supervisory functions empower the FSS to bring considerable information from the insurance sector and its affiliated activities to the macroprudential process, as well as the resulting assessments and the trends in these assessments from the RAAS. The RAAS brings an element of materiality to take account of nature scale and complexity by evaluating expectations of insurers in terms of their risk assessment grades, particularly as larger insurers have a greater importance to the system than smaller ones. Macroprudential intervention tools have been developed to address banking, credit cards, and other non-insurance sector interventions. Sources of input include a financial returns and risk assessments from the micro prudential oversight of insurers as well as input on broader economic conditions, supported by collaboration with the BoK. The KIDI also acts as a resource. Use of additional tools such as stress testing and forward looking scenarios of risk have been developed in partnership with the KIDI. The Macroprudential department of the FSS also does stress testing. Insurance companies are also required to conduct stress tests using scenarios defined in a stress testing guideline. The scenarios are selected and prioritised by senior FSS leadership. In the event of an external shock, a task force could be established to conduct specific tests in response to that event. The macro scenario top down approach is generally covered by the macroprudential supervision department and a bottom up approach is taken when the insurance supervision department does stress testing. The BoK issues a financial stability report and, through their collaboration with the FSS, there is consideration of insurance issues in that process although this has not elevated to the level of substantial coverage in the report itself to this point. Assessment Observed Comments The FSS should continue to develop its capacity to identify emerging risks relevant 30 to the insurance sector and the treatment of these in integrated stress testing, particularly where insurers are part of financial groups, and could further diversify the range of sources that might suggest issues for further analysis such as consideration of legislative changes on insurance experience. ICP 25 Supervisory Cooperation and Coordination The supervisor cooperates and coordinates with other relevant supervisors and authorities subject to confidentiality requirements. Description Domestic Arrangements Both the BoK and the KIDC can and do request the FSS to conduct inspections (alone or jointly). These organizations are also represented on the board of the FSC as is the MOSF. MoUs are in place with BoK and KDIC. International Cooperation The Korean authorities have taken an active role in all international level entities of relevance and have clearly benefited from this engagement. The FSC establishes MoUs to support international cooperation and has arrangements in place with 35 organizations, 14 of them being insurance supervisors including key entities that host operations of Korean insurers outside Korea. Regular meetings are held with counterparts where the business relationships are most significant. The authorities accept inspections from other supervisors visiting Korea and also go out to inspect operations elsewhere. In some cases they have even conducted joint inspections as a sign of the extent of the cooperation. Group-wide Supervision Arrangements Supervisory colleges are not currently in place for domestic insurers with foreign operations although there is a consideration to do so in the future at some time. Current cooperation arrangements facilitate exchange with the key jurisdictions where Korean insurers are doing business Mainland China, Chinese Taipei, Thailand some small operations for property insurers in the US. Assessment Largely Observed Comments The authorities should look to deepen engagement in cooperation activities relating to groups (FHC approved or not) by exploring exchange of understanding of supervisory issues at operational levels, contingency planning, and through supervisory colleges. ICP 26 Cross-border Cooperation and Coordination on Crisis Management The supervisor cooperates and coordinates with other relevant supervisors and authorities such that a cross-border crisis involving a specific insurer can be managed effectively. Description Currently, the FSS does participate in some supervisory colleges as host supervisor although the content of discussions is somewhat preliminary. Discussions have centered on modalities such as the effective operation of confidentiality within the college and being informed of the overall business landscape of the entity. The authorities do meet regularly with key counterpart jurisdictions. The FSC is planning to join the IAIS MMoU. They are well advanced toward 31 submitting their application to become a signatory. Bilateral MoUs provide the framework for crisis response but not at an explicit level of detail. The FSS maintains a network of overseas offices that also provide a useful cooperation platform for engagement and preparedness plans. These offices tend to have a monitoring brief. The FSS is able to exchange information for supervisory purposes (refer ICP 3). Assessment Largely Observed Comments The authorities should look to deepen engagement in cooperation activities relating to groups (FHC approved or not) by exploring exchange of understanding, and through supervisory colleges. Discussion on expectations in the event of insurer distress as part of preliminary planning with key counterpart jurisdictions to take the elaboration to a deeper level of operational detail. The authorities should continue the IAIS MMoU process. References: IAIS (2011), Insurance Core Principles and Methodology, available at the IAIS web site www.iaisweb.org Thorburn, C., (2008) “Insurers: Too Many, Too Few, or “Just Right”? Initial Observations on a Cross-Country Dataset of Concentration and Competition Measures”, World Bank Policy Research Working Paper 4578. 32