International Insurance Foundation Annual Symposium: October 12, 2007 Washington, D.C., USA

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1 KORUS FTA: Its Meaning and Implications International Insurance Foundation Annual Symposium: October 12, 2007 Washington, D.C., USA W. Jean Kwon, Ph.D., CPCU School of Risk Management St. John s University, New York

2 Key Points to be Addressed Key agreements in insurance Market comparison US vs. Korean markets Market and product analysis Key market issues New opportunities US insurers Korean insurers W. Jean Kwon

3 KORUS FTA The negotiation Eight formal negotiation rounds from February 2006 Final agreement in April 2007 The scope The largest FTA in terms of foreign market size for the US Korea being a major export/import market Dealt with every economic sector discussed, including Financial services Investment Negative list approach matters deemed covered unless specifically excluded in the agreement W. Jean Kwon

4 KORUS FTA Financial services Banking, investment and insurance Cross-border transactions Wider scope of regulation Clarification on the institutions regulated by the Korea Financial Supervisory Commission/Service (FSC/FSS) Unregulated institutions also to be subject to regulatory oversight W. Jean Kwon

5 KORUS FTA Insurance Creation of Special Annual Insurance Committee to address foreign insurer market access issues Korea Post To be subject to FSC oversight/regulation Non-issuance of new products Regulation in 3 years of special cooperatives Agricultural Cooperative, Fisheries Cooperative, Community Credit Cooperative, and National Credit Union W. Jean Kwon

6 KORUS FTA Insurance Exercising principles of most-favored nation, national treatment, and transparency In the case of Korea, the principles affecting, among others: Korea Insurance Development Institute Database and advisory rating organization Korea Life Insurance Association Korea Nonlife Insurance Association W. Jean Kwon

7 KORUS FTA Cross-border transactions US-based insurers to be permitted Processing customer data abroad within 2 years of entry into force of the agreement Providing investment advice from abroad US-based insurance services providers To be permitted W. Jean Kwon

8 Market Comparison

9 US-Korea: Market Size Comparison 14000% 12000% 10000% 1980 The US was 140 times larger than Korea The US was only 12 times larger than Korea 8000% 6000% 4000% 2000% 0% W. Jean Kwon

10 US-Korea: Real Growth of Premium 60% 50% 40% Korea 30% 20% 10% US 0% -10% -20% W. Jean Kwon

11 US-Korea: Insurance Density $4,000 $3,500 $3,000 $2,500 $2,000 US $1,500 $1,000 $500 Korea $ W. Jean Kwon

12 US-Korea: Insurance Penetration 14.0% 12.0% Korea 10.0% 8.0% US 6.0% 4.0% 2.0% 0.0% W. Jean Kwon

13 US-Korea: Year 2006 US Korea Direct Premiums (Total) $1,170 B $101 B Life Only $534 B $72 B Share of Life Insurance 45.6% 71.3% Insurance Density $3,924 $2,071 Life Only $1,790 $1,408 Insurance Penetration 8.83% 11.11% Life Only 4.03% 7.94% Number of Insurers 4, Life Only 1, Share of Foreign Insurers (Life) by Premium (2006) 1% Share of Foreign Insurers (Nonlife) by Premium (2003) 1% W. Jean Kwon

14 Foreign Insurers in Korea (2006) Allianz (1954) MetLife Korea (1988) Prudential (US) (1989) PCA Life (Pru UK) (1990) New York Life (1990) ING Life (1991) Lina (CIGNA) (1987) AIG Life (1987) American Home Assurance (AIG) (1947) Hartford/CIGNA/Ace (1968) Chubb (1992) Gen Re (?) First American Korea (1999) Mitsui-Sumitomo (2002) Tokio Marine (c. 2003) Swiss Re (c. 2001) Munich Re (c. 2001) Scor (?) W. Jean Kwon

15 Nonlife Insurance Product Distribution US (2006) Korea (March 2007) Automobile (41.8%) Homeowner s (12.5%) Other liability (9.4%) Workers comp. (9.3%) Financial guaranty (0.5%) Long-term (47.69%) Automobile (33.25%) Special lines (9.01%) Credit/financial Guaranty (3.98%) Individual pension (2.78%) W. Jean Kwon

16 Life Insurance Product Distribution US (2006) Koea (2005) Annuities (50.1%) Ordinary life (20.9%) Group life (5.7%) Accident/health (23.0%) Annuities (12.04%) Life insurance (76.26%) Group life (5.04%) 96% of Koreans covered by the National Health Insurance Program introduced in 1999 W. Jean Kwon

17 Key Market Development Issues US Insurer solvency Securitization Catastrophe Other ARTs Transparency Accountability Accounting standards Reinsurance regulation KOREA Insurer solvency Rate deregulation IPO of life insurers Nonlife insurer operations Long-term business Product distribution Bancassurance Privatization of Korea Post W. Jean Kwon

18 Korea Financial Supervisory Comm. (FSC) FSC Financial Supervision Policy * Financial Supervision Policy * Banking Supervision *N Non-banking Supervision i * Other Financial Services Supervision (e.g., foreign exchange) * Securities Supervision * Insurance Supervision * Investment/Asset Management Supervision * Market Monitoring Planning & Administration Futures Market Sub-committee Public Relations W. Jean Kwon

19 Impact of the Agreement

20 Market Access US the market to be more widely open, the opening being commercially meaningful Korea not much of an issue as the markets have long been open Outstanding issues Transparency and national treatment Government agency and major industry associations Public listing of insurance companies, especially life insurers Foreign insurer listing opportunity for future use of local and foreign capital Privatization of Korea Post W. Jean Kwon

21 Investment Opportunities Introduction of the Consolidated Investment Act Broader investment opportunity from 2009 Larger capital basis for banking, investment and insurance companies Permission of cross-sectoral business Insurance holding company For large insurance companies M&A of small insurance companies W. Jean Kwon

22 Cross-border Insurance Export by the US (2005) $6.8 billion including $74 million to Korea and $158 million to Mexico Possible increase in export with the permission of database services by insurers in the US Import by the US (2005) $28.5 billion including $15 million by Korean insurers Plus $81.3 billion by US affiliates of foreign insurers Not much of a new issue as the US market has long been open W. Jean Kwon

23 Cross-border Insurance US companies to Korea Likely limited to: Marine, aviation and transportation insurance (2.2% share of the market in 2005) Reinsurance and retrocession, and Ancillary services to insurance, such as consultancy, RM, actuarial and claims management, and intermediation services Korean companies to the US Minimal changes Possible direct provision of insurance in lieu of current fronting arrangements W. Jean Kwon

24 Cross-border Insurance (Korea) Year Business Line Remarks Prior Reinsurance Export cargo Entrance of foreign insurers to Korea 1995 Import cargo, aviation, etc Life, hull, transportation, OECD accession travel, accidental National treatment 2007 Brokerage and ancillary services (new) KORUS FTA W. Jean Kwon

25 Questions & Answers

26 References Congressional Research Service (2007), The Proposed South Korea-US Free Trade Agreement (KORUS FTA), (July 18): CRS: Washington, DC. Kim, H.W. (2007), KORUS-FTA: Evaluation and Policy Implications, Journal of Korea Nonlife Insurance Association (May): Kim, J.B. et al. (2007), FTA and Financial Competitiveness, Seoul: Korea Institute of Finance. Kwon, O.K. (2007), The Present and Future of the Korean Capital Market, The Korean Capital Market Congress 2007, May 14, Seoul: Grant Hyatt Hotel. US International Trade Commission (2007), US-Korea Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects, (September), USITC: Washington, DC. y,( p ), g, Annual Report and Statistics, Korea Life Insurance Association. Annual Report and Statistics, Korea Nonlife Insurance Association. Korea Financial Supervisory Commission. Korea Insurance Development Institute. Other in-house or proprietary documents and reports W. Jean Kwon

Insurance Statistics Information

Insurance Statistics Information in Financial Supervisory System of Korea 26 27 January 2012 Jang, Seung-Rok Contents Ⅰ. Ⅱ. Ⅲ. Ⅳ. Outlook of the Korean Insurance Industry Financial Supervisory System of