Regulatory Issues of Concern to European ICT Companies in Korea (From EUCCK IT & Telecom Committee, Updated on: February 16, 2009) Introductory Comments: During the past decades Korea has become world leader in ICT industry. The global success stories of Samsung and others are well recognized around the globe. Furthermore, Korea is also known as one of the most broadband penetrated countries and as the home of early adapters of mobile technology. This development has indeed been impressive and it has opened many doors for Korean companies and Korean ICT products in the international arena. Nevertheless, currently Korean ICT policy and ICT industry stand in a cross-road. The domestic market for mobile phones, broadband, and services is almost fully saturated. To further develop their business Korean companies have to look towards foreign markets. To become competitive outside certain limited sectors (including mobile handsets), Korean companies in ICT sector should adapt to international competition and to international standards. To be effective, this adaptation should take place in the domestic Korean market. However, until now the domestic market has remained protected and closed via direct and in-direct barriers to trade and services provided by foreign ICT companies. It is the position of the EUCCK IT & Telecom Committee that full liberalization, and international standardization of the Korean market will not only benefit the Korean consumer by lowering the high prices of equipments and services, but this action will also enhance the global competitiveness and international cooperation capabilities of Korean ICT companies. Thus, removing the market access barriers from the Korean ICT market would be beneficial for the Korean economy as a whole. The EUCCK IT & Telecom Committee would like to contribute to Korea’s efforts to become a world-leading ICT power by expanding the presence of European ICT companies in Korea, by creating jobs, and by sharing insights with the Korean regulators and businesses. Items Issues Recommendations 2009-01 Cross Selling   Cross-Selling by Solicitors From August 30, 2008, under the Insurance Business Law (IBL), an insurance solicitor is allowed to cross-represent life insurer, non-life insurer and one third sector insurer.- This means that an insurance company can no longer engage its tied sales forces on an exclusive basis. The known rationale behind the new IBL legal position is the expectation that the cross-representation would produce more income for solicitors to compensate the relative income loss resulting from the implementation of the bancassurance business since 2003. However, EUCCK member insurers believe that the cross-selling system could bring about more side-effects than benefits, while it remains questionable whether it would result in the benefits intended, i.e., increase of income for the solicitors. For example, only those solicitors whose high performance can elevate their productivity and profitability, will survive, at the expense of the solicitors who are in the other spectrum with dwindling income. The result might be driving quite a few solicitors out of the market. Another side-effect anticipated from cross-selling system is that the solicitors will focus on selling products that reap high sales commission and, consequently, customers may be led to buy insurance products without accurate and necessary information on other insurance products that are more suitable for their individual needs. Cross-Selling at Company Level Apart from the issue of cross-selling at solicitor level per recently effective IBL provision, it remains unclear whether the current IBL allows an insurance company to be a distributor or agent for another insurer. Prior to the comprehensive amendment of the IBL in 2003, Article 9 of the then existing IBL used to specifically allow an insurance company to be the agent/broker of another insurance company. However, in the process of the 2003 IBL amendment, while the previous Article 9 has become Article 11 of the new/current IBL whereby more types of permissible businesses for an insurer were newly added, somehow the part of the Enforcement Decree of the IBL that corresponds to Article 11 of the IBL, i.e., Article 16 of the new/current Enforcement Decree, omitted this important provision. This appears to be an ‘inadvertent omission’, given the spirit of the IBL revision to liberalize incidental businesses for insurers.     EUCCK member insurers operating in Korea would like to underscore the fact that in no other advanced insurance markets there is any such law or regulation that forces an insurance company to allow its tied sales force to be an agent of another insurer, or any law that prohibits exclusive relationship with its agents. In the US, it is legal to have “captive” or “tied” agents, namely, exclusive agents by contract. In other words, there exists no law to force life insurance companies to allow their tied agents to become agents of another non-life insurer, and vice versa, in the US. Also, in Europe, tied agents are allowed as there is no limitation imposed on an insurer’s ability to contract with its agents. EU directive has focus on the status of the individual sales person, tied or untied, independent from the organizational structure s/he belongs to. In addition to the freedom of contract principle, it should also be considered that insurance companies have invested a tremendous amount of time and efforts to train and manage their sales forces and provide a sales infrastructure at its cost. As such, it would only be fair for an insurer to be allowed to keep their agents on an exclusive basis by contract and by law. At any time it can be in the discretion of insurer and solicitors to agree on a general agent contract principle which reflects the freedom of choice of a solicitor. After all, it should be left with the market to dictate whether an insurance company has agents of multiple relationships with other insurers or on an exclusive basis. The European insurance companies in Korea wish to be allowed to become distributor/ agent/broker of another insurance company as an incidental business, by clarifying the above-discussed provision in the IBL Enforcement Decree. Company-level cross-selling is already permitted in Europe, as there exists no limitation in any insurer to partner with any other insurer and all sales channels for an insurance company in Europe have no limitations in terms of the number of co-operations, volume, products and sales volume. Clarifying the IBL Enforcement Decree would also be consistent with the 2003 IBL amendment, which allowed more incidental businesses for insurers, as well as the practice in other advanced markets. 2009-02 Credit Card Payment of Insurance Premiums Under the Specialized Credit Financial Business Act (“Credit Business Act”), all credit card merchants (i.e., company registered as a credit card receiver) must accept credit card payment and shall not refuse payment by credit card. This law does not recognize any exception for an insurance company to reject credit card payment by customers when payment by credit card is not appropriate. For insurance companies, examples of inappropriate use of credit card include: payment of renewal premiums where there may not be personal contact between sales agents and the customer; and premium payment of savings type or investment-linked insurance policies where credit card payments may cause moral hazard among customers, since credit card payment is a type of loan from the credit card company. Many customers do not seem to realize that the costs of credit card transaction are embedded with their insurance premiums. If an insurance company is required to take credit card payment in all cases, it would inevitably increase the acquisition costs or expense of new business, which will ultimately be borne by the customer. 2009-03 Banc-assurance The fourth phase of bancassurance liberalization was cancelled in February, 2008. Furthermore, the future development of bancassurance in Korea looks uncertain. Originally banks were to be allowed to sell multiple insurance products with the idea that this liberalization will benefit the customers by providing them a better choice and more options to choose between qualified financial consultants selling insurance services. Distribution of insurance through banks - with appropriate controls over the training and accreditation of sales people - allows the public greater access to insurance products through professional, well-regulated financial institutions. The introduction of know-your-customer and product suitability requirements in the Capital Markets Consolidation Act and Insurance Business Law will allow consideration of customers’ entire financial needs - including insurance - in a single financial planning discussion. Market development shows the high acceptance of bancassurance and it is inappropriate that customers should be denied access to the full range of insurance product solutions - from properly regulated and controlled insurance companies - when arranging their financial affairs through their bank. Experience in other countries has shown that the development of bancassurance has made insurance more widely available to people in a way that complements and integrates with their other financial services. This has been particularly important in the spread of ‘third-pillar’ retirement savings which is urgently required in almost all developed and developing countries. The foreign financial industry strongly supports the full liberalization of bancassurance according to the original plan and recommends the National Assembly to further pursue this process in earliest possible opportunity. The liberalization of bancassurance will benefit the consumers in terms of wider choice of products and a more competitive insurance market. It must be the free decision of the customer where to purchase his insurance cover. The restriction on the number of people allowed to complete insurance sales in each branch should be removed, to allow consumers greater access to qualified individuals who can assist them with their long-term savings and protection needs. This will help raise awareness and consideration of long-term saving and protection of families’ financial security, as part of their overall financial portfolio. 2009-04 Product Development Presently, in terms of regulatory filing, insurance products are categorized into two types: ‘File & Use’ and ‘Use & File’. A vast majority of new products (about 89%) are known to fall under ‘Use & File’ category, namely, insurers launch new products first and subsequently file with the regulator. According to the amendment plan announced by the then Ministry of Finance and Economy (MOFE) in December 2007, for the purpose of further deregulating product development process, insurance products will be categorized into ‘File & Use’ and ‘Free Use’ (tentatively), thereby the post-sale filings concerning products of the current ‘Use & File category will be saved. In this regard, however, it is stated that, given the fact that ‘Free Use’ is in the beginning stage, the regulator will attempt to increase the current percentage of ‘File and Use’ products (presently about 11%) up to 15% to 25%. From insurance companies’ perspectives, the described plan is going towards the reverse direction of product autonomy because the plan intends to increase the percentage of ‘File & Use’ category relative to its present ratio. The announced plan to increase ‘File & Use’ category of products poses the risk of strengthening regulatory intervention of product development process, contrary to the stated purpose. Rather, the purpose of autonomy or deregulation of product development process will be better served if the current regulation or regulatory guideline contains more specific provisions to relax some of the current regulations applied to product development activities of insurers. 2009 - 05 Level Playing Field for Reinsurance Companies The EUCCK supports easy market access of reinsurance companies to the Korean market. However, at the same time the Chamber recognizes the need to protect local insurance companies and policyholders, from the potential default or non-payment by offshore, non-admitted reinsurers. For example, to tackle this issue Australia has recently imposed new reinsurance regulation. According to the regulation future offshore reinsurance (claims) recoverables will be subject to a risk weighted scale of capital factors based on the counter-party grade of the offshore reinsurer. This will range from a 20% capital factor for AAA reinsurers to a 100% capital factor for BBB rated reinsurers. In addition, reinsurance receivables that are overdue more than six months will be subject to a 100% capital charge irrespective of the rating. It is expected that implementation of these, or similar guidelines, will better serve to protect local insurers and their policyholders. It will serve to attract further foreign reinsurers to establish branch operations creating a competitive, but fair, reinsurance industry. 2009 - 06 Conflict of Interest Prohibition System Under FISCMA   Referring to the Article 135 of Indirect Investment Asset Management Act (Special Rules for Insurers) - exclusions in case of outsourcing variable funds - the establishment of a ‘conflict of interest prohibition system’ under new FISCMA causes several issues for insurance industry because it does not recognize these exclusions, which were recognized prior to FISCMA. Following issues are predicted by the industry: (1) Increasing workload and cost - Set up separate Audit Committee, Internal Control Committee - Replenish directors/staff due to prohibition of occupying dual positions in different companies - IT monitoring etc to check up on Internal Control Standards (2) Overlapping regulation with Internal Control Organization under Insurance Business Act - It is not convincing that those items excluded from the special rules are included in the FISCMA - Increase too much of workload and cost burden of insurers (3) It is not reasonable to strictly apply standards equally to asset managers - Variable funds are outsourced 100% to counterparties which perform control in accordance with law. Expand/Increase the scope of provisions for special IPR training sessions at the International Intellectual Property Training Institute, putting particular attention to the sessions on discriminating between genuine and counterfeit goods so as to help law enforcement officers obtain in depth expertise on techniques when investigating counterfeit goods Include IPR training sessions on how to distinguish counterfeits from genuine products during the annual “IPR Investigation and Infringement Crackdown” training program dedicated for prosecutors and law enforcement agents Nurture communication channels between the right-holders and the police, especially in connection to IPR training programs 2009 - 07 Commercial Freedom to Operate While the EUCCK recognizes the protection of policy holders as the main and the most important duty of the industry and regulations, the Chamber emphasizes that regulations should not limit the commercial freedom of company operations, as long as customer protection has been properly taken care of. There are several instances where either the regulation or the interpretation of a regulation limits the commercial freedom of insurance companies. (1) Freedom to outsource asset management services In respect of outsourcing asset management services an insurer is required to outsource only after an open tender process. This seems inefficient in the case when the insurer had previously done the work in-house and was outsourcing to create better synergies through shared services. In some cases there is an implicit assumption that arm’s length transactions can only be established by using more than one service provider. This can increase the complexity of the business and potentially increase the business risk for an insurer. (2) Freedom to set commission-base for solicitors - Essentially the current “regulations” (or guidelines) is that commissions are limited to the alpha loading. However as we move to investment type products we would like to move to commissions paid on assets under management - we see this development in other markets like US / Australia, etc. The advantage is that it moves away from front-end loaded distribution costs to more level service costs which could be considered fairer. (3) Freedom to set cover and prices for insurance products Insurer develop products based on prior market research in order to meet customer satisfaction. To avoid adverse selection and to spread the risk on a wide insured population, product features have to be packaged. The freedom to decide about the package must be in the discretion of the company and will reflect adequate risk pricing. The pricing should to a wide extend rely on the insurers experience and data. As long as customers are properly protected (sound solvency situation), insurance companies should be allowed the commercial freedom to choose their partners, to set commission systems, and to set prices for their products, according to relevant calculations and reflecting evidence-based data. This should be particularly the case for short term insurance products. 2009 - 08 Overseas Data Processing Under the PUCIL (Protection and Use of Credit Information Law), a company is allowed to outsource data processing to local corporations, but still prohibited from sending its customer data to their overseas affiliates even for purely data processing purposes.- This is due to the requirement under the PUCIL (Article 16) in conjunction with its Enforcement Decree (Article 8-2) that an eligible third party to which data processing can be outsourced must be a ‘chusikhoesa’, which refers to, by definition, a stock corporation incorporated in Korea. In effect, the rule prohibits a global corporation operating in Korea from consolidating its IT center in any region other than Korea, and thus, serves as a strong disincentive to multinational companies contemplating to invest in Korea.- To redress this problem, the requirement of ‘chusikhoesa’ must be removed from the law. 2009 - 09 Evaluation of insurance company’s business results New Article 6(3) of the Insurance Business Law (IBL) states that ‘an insurance company shall have satisfactory business results and sound financial condition’ if the company wishes to obtain approval for additional insurance items. This requirement is both vague and also working against any benefits an M&A through a new foreign direct investment (FDI) might bring. Strict maintenance of this requirement prevents a turn-around of nonperforming insurance company through M&A, as there is no proper possibility of business re-structuring and reacting to external market changes. This in turn will have a negative effect to employment and customer service. Furthermore, from a risk management perspective being restricted to the execution of a single line of business any benefit from diversification into other lines, hence economies of scale and scope, and a overall reduction of risk exposure are effectively inaccessible to new market entrants. Insurance companies should be able to receive approvals for additional insurance items if their business plan and current financial condition (including FDI impact) create a believable ground to fulfilling the mentioned business plan and as long as requested solvency margins are met or guaranteed. This approach would better prevent an overall market failure. 2009 - 10 Group Credit Payment Protection (“Group CPP”) insurance “Credit Payment Protection (“CPP”)” is an insurance product whereby borrower of lender financial institution would receive insurance payment from insurer in the event of borrower’s qualified death or disability, for repayment of the outstanding loan. CPP has various economic benefits to borrowers, lenders and insurers, which have been well proven in Europe. Due to its benefits, CPP has become a core business for insurers in many advanced insurance markets in Europe (for example, the volume of CPP market in Europe amounted to KRW42 trillion as of 2005), and most products in Europe are sold in the form of “Group” CPP because it is economically more beneficial (i.e., premium discounts due to lower administrative costs and less complexity) to borrowers, lenders and insurers mutually, than individual CPP. In Korea, however, since the FSS issued a guideline in August 2005 to regulate the Group CPP sales and market, the Group CPP business has almost collapsed and become entirely dormant. Under the FSS Guideline issued on August 19, 2005 and titled “Instructions on Packaged Sale of Insurance Products and Financial Product” (“Guidelines”), if a lender financial institution subscribes to Group CPP, such lender financial institution is prohibited from receiving mark-up or sales commission from the borrower customers or the insurers other than the relevant insurance premiums. Also, if the lender financial institution pays the insurance premium and then attributes it to the borrower customers by raising the loan interest rates, the lender financial institution should break down the interest rate to show such raise and should obtain consent by the borrower customers thereon. Further, lender financial institution’s profit sharing with insurers is not allowed except for those who pay the entire insurance premium by themselves and whose insured borrowers exceed a certain number. Accordingly, under the Guidelines, lender financial institutions would hardly have any business motivation to engage in the Group CPP because they are not allowed not only to make a profit from the transaction but even to recover the minimum necessary costs, such as administrative costs for contract management, to engage in the business. The EU Chamber provides the following measures to realize the effective enforcement of the law against Copyright Law infringement: In order to activate the Group CPP business, of which the benefits are well proven in advanced markets, the Guidelines that unduly discourage lender financial institutions from engaging in the Group CPP subscription should be lifted, i.e., the lender financial institutions should be allowed to receive an appropriate level of handling fees from either borrowers or insurers, at least to recoup their costs necessary to be incurred for engaging in the business.