K-ICS Ratios of the Korean Insurance Industry in March 2023

Implementation of K-ICS and transitional measures

Since January 2023, the Korean-Insurance Capital Standards (K-ICS) have replaced the risk-based capital (RBC) regime in Korea. This new capital regime, which came into force alongside the implementation of IFRS 17, requires insurance companies to measure their assets and liabilities at market value and use a full fair-value balance sheet to calculate the required capital. It allows risk measurement to be more precise using shock scenarios, and the required capital of an insurer is defined as the value-at-risk (VAR) of the own funds of the insurer subject to a confidence level of 99.5%. With K-ICS becoming effective, the supervisory regime of the Korean insurance industry now aligns with global best practices and standards.

Insurance companies in Korea have proactively prepared for the introduction of K-ICS, as their capital buffers could be potentially squeezed when both assets and liabilities are measured at market value under the new capital regime. To bolster their capital, they have been taking various measures, such as issuing subordinated debt or hybrid capital securities, entering into coinsurance deals, and adjusting their product portfolios.

Recognizing that some insurers may need more time to improve their capital strength or adapt to the new requirements before having to fully comply with K-ICS, the regulator has allowed them to take transitional measures after prior approval. These measures aim to smooth out the financial impacts of the K-ICS implementation over time. As of late March 2023, 19 insurers have applied transitional measures, effectively preventing a significant decline in the K-ICS ratio of insurers.

K-ICS ratios of insurers in Korea as of late March 2023

The K-ICS ratio of an insurer is a key measure of how financially strong an insurer is, indicating its ability to absorb losses and pay insurance claims to policyholders. It gives insight into the insurer's cash flow as well as whether this cash flow is adequate enough to meet the company's liabilities. The lower the ratio, the higher the likelihood that the company will default on its financial obligations.

Insurers in Korea are required by law to maintain the ratio at 100% or above, and their ratios are regularly monitored by the Financial Supervisory Service (FSS), which is responsible for identifying solvency issues of insurers at an early stage and intervening effectively in order to minimize losses to policyholders. In case of any signs of deterioration in the ratio, the financially weakening insurer will be guided to take proactive actions such as more rigorous stress testing and capital raising.

The insurance industry witnessed a significant improvement in its K-ICS ratio after the implementation of transitional measures. At the end of the first quarter of 2023, the K-ICS ratio increased by 13.1%p to 219% compared to the RBC ratio three months earlier, according to FSS. The K-ICS ratio of life insurers rose by 13.1%p to 219.5%, while non-life insurers experienced a jump of 13.2%p, reaching 218.3%.

*The ratios as of late March 2023 refer to K-ICS ratios after the application of transitional measures

(Source: Financial Supervisory Service, Insurance Companies’ Capital Adequacy Ratios under K-ICS, March 2023, Press Release dated July 11, 2023)

Without the application of transitional measures, the K-ICS ratio of the insurance industry decreased by 7.8%p to 198.1% as of late March 2023. This impact was more pronounced for life insurers, with their ratio declining by 13.8%p to 192.7%. In contrast, non-life insurers saw their ratio increase by 1%p to 206.2%.

The amount of insurers' available capital increased by 75% to KRW 244.9 trillion before transitional measures as of the end of March 2023 due to a growth in net worth following interest rate decreases and the inclusion of the contractual service margin into available capital. There was an 82% increase in their required capital as a new set of insurance risks were included in the calculation of capital requirements, along with the use of a higher confidence level of 99.5%. 

The application of transitional measures resulted in an increase of KRW 2.1 trillion in available capital and a decrease of KRW 10.8 trillion in required capital, bringing the total amounts to KRW 247 trillion in available capital and KRW 112.8 trillion in required capital. Thanks to this relief impact of transitional measures, the K-ICS ratio was up by 20.9%p compared to the calculation before the application of transitional measures.    

In addition to transitional measures, supervisory authorities also implemented other regulatory relief efforts to ensure a smooth introduction of K-ICS. One such measure, introduced by the Financial Services Commission (FSC) in June 2022, allowed insurance companies to recognize a portion of their reserve surplus under the liability adequacy test (LAT) as available capital when calculating RBC ratios. This measure aimed to support the insurers struggling with declining RBC ratios due to valuation losses on fixed-income securities amid higher interest rates. Under this new measure, insurers were permitted to add up to 40% of the LAT surplus to their available capital, but only within the limit of losses on the valuation of available-for-sale securities when calculating the RBC ratio.

These measures played an instrumental role in helping insurers adapt to the new K-ICS framework despite added pressure on their capital strength under the revised standards. On top of that, a higher interest rate environment is helping them reduce the value of their liabilities. When interest rates rise, the value of liabilities, particularly long-term liabilities, may decrease. This is because the present value of future obligations declines when discounted at higher interest rates. As a result, the overall capital requirements might be alleviated, as the reduced liabilities would result in a lower amount of capital needed to cover those obligations. This can provide some relief to insurers facing challenges in maintaining their capital adequacy ratios during periods of rising interest rates.

Solvency capital management is of critical importance for insurers, as it ensures the stability and resilience of their operations in the face of varying market conditions and regulatory requirements. In light of the evolving landscape and the complexities introduced by the new K-ICS framework as well as increased interest rate volatility, insurers are expected to remain proactive in enhancing their capital strength. They will continue to adopt robust risk management practices, explore innovative financial solutions to bolster their capital buffers, and optimize their investment portfolios to better respond to market changes.