[Financial Microscope] Financial Services Commission Considering MG Insurance Liquidation... 11,470 Unprotected Subscribers Inevitably Affected

Total MG Insurance Policyholders: About 1.24 Million
Actual Losses Limited to 11,470 Unprotected Policyholders
Financial Services Commission: "There Are Not Many Options"
Liquidation Manual Under Review
Rising Anxiety Among Policyholders
Decision to Be Made as Soon as Possible

"There are not many options."

The financial authorities are reviewing related manuals in preparation for the liquidation of MG Insurance. After Meritz Fire & Marine Insurance gave up on the acquisition, there is a prevailing sentiment both inside and outside the financial authorities that there are almost no options left, placing more weight on the possibility of liquidation. Accordingly, the Financial Services Commission is reportedly reviewing response measures, including assessing the scale of expected losses to affected parties.

Approximately 11,470 policyholders face losses upon liquidation... Forced insurance transfer difficult

According to the financial authorities on the 18th, about 11,470 MG Insurance policyholders are estimated not to be covered by depositor protection. If MG Insurance is liquidated, compensation up to 50 million KRW is possible under the Depositor Protection Act. The total contract amount exceeding 50 million KRW for these policyholders is 175.6 billion KRW. These policyholders would find it difficult to enroll in insurance with other companies under the same conditions if MG Insurance is liquidated.

The Financial Services Commission and the Korea Deposit Insurance Corporation have four major alternatives to consider: ▲ pursuing a fourth sale via mergers and acquisitions (M&A) ▲ forced contract transfer ▲ establishment of a bridge insurance company ▲ liquidation or bankruptcy.

Within the insurance industry, the forced transfer case of the former Regent Fire & Marine Insurance in 2003 is often cited. Regent Fire & Marine was designated as a failing financial institution in March 2001, and in May, the Korea Deposit Insurance Corporation conducted a public sale. When the sale failed, the Public Fund Management Committee under the Financial Services Commission forcibly transferred 330,000 insurance contracts of Regent Fire & Marine to five insurers: Samsung Fire & Marine Insurance, Hyundai Marine & Fire Insurance, Dongbu Insurance (now DB Insurance), Dongyang Fire & Marine Insurance (now Meritz Fire & Marine Insurance), and LG Fire & Marine Insurance (now KB Insurance).

General insurance was taken over by Dongyang Fire & Marine Insurance, long-term and pension insurance by Samsung Fire & Marine Insurance, and automobile insurance by LG Fire & Marine Insurance and Dongbu Insurance. At that time, the Korea Deposit Insurance Corporation provided a total of 238.6 billion KRW in support to the companies.

However, the consensus now is that forced transfer is practically difficult. A financial authority official stated, "If forced transfer is decided, the insurer taking on the policyholders must pass a board resolution," adding, "The Regent Fire & Marine case occurred right after the Asian financial crisis, so there was great concern about spillover effects to other insurers, and it was not a time sensitive to issues like abuse of authority or breach of trust as it is now."

Establishing a bridge insurance company also impossible... Liquidation likely

Another alternative mentioned, the establishment of a 'bridge insurance company,' is also criticized as being against principles. According to Article 38-4 of the Depositor Protection Act (Minimum Cost Principle), "When paying insurance claims or providing financial support, the method that minimizes losses to the Deposit Insurance Fund must be applied."

The Korea Deposit Insurance Corporation initially decided to sell MG Insurance to Meritz Fire & Marine Insurance through a transfer of assets and liabilities (P&A) because it was judged to best comply with the minimum cost principle. If MG Insurance were to be made into a bridge insurance company, the Korea Deposit Insurance Corporation would have to incorporate it as a subsidiary through capital injection, which would be costly and politically burdensome. There is also the risk of recurrence of conflicts with the MG Insurance labor union and employment succession issues, which were causes of the failed sale. Therefore, the view inside and outside the financial authorities is that there is no reason for the Korea Deposit Insurance Corporation to establish a bridge insurance company.

The fourth sale via M&A is considered unrealistic and was not even a subject of consideration from the start. Currently, the Financial Services Commission is reportedly convening stakeholders regularly to devise realistic response measures based on principles. If the insurance industry refuses forced transfer and the Korea Deposit Insurance Corporation does not want to establish a bridge insurance company, stakeholders are likely to decide on liquidation.

Accordingly, the Financial Services Commission is reviewing scenarios with the possibility of liquidation in mind. Earlier, Financial Services Commission Chairman Kim Byung-hwan said at a monthly press briefing, "The MG Insurance sale process has been ongoing for a long time, and basically, there are not many options."

If liquidation actually proceeds, losses for non-protected policyholders are inevitable. A financial industry official explained, "The 11,470 policyholders not covered by depositor protection will receive bankruptcy dividends," adding, "If MG Insurance disposes of its assets after entering liquidation, non-protected policyholders can recover about 80-90% of their insurance claims." In other words, some losses are unavoidable.

The Financial Services Commission intends to make a decision regarding MG Insurance as soon as possible. Delaying the decision would only increase policyholders' anxiety. The final decision is expected by the end of March at the earliest, or by April at the latest.

A senior financial industry official said, "The MG Insurance labor union took a hardline stance during employment succession negotiations, saying 'We would rather have bankruptcy than be acquired by Meritz Fire & Marine Insurance,' which was a misjudgment," adding, "While forced transfer-free liquidation of an insurer is expected to be impossible, it is highly likely that the matter will be handled according to principles."