K-ICS Ratios of the Korean Insurance Industry as of June 30, 2023

K-ICS Ratios Improved as of Late June 2023

The insurance industry showed an improvement in its solvency after the implementation of transitional measures under the new regime of the Korean-Insurance Capital Standards (K-ICS) at the end of the second quarter of 2023 compared to three months earlier. Its average K-ICS ratio increased by 4.7%p to 223.6%, according to the data released by the Financial Supervisory Service (FSS). The K-ICS ratio of life insurers rose by 4.9%p to 224.3%, while non-life insurers saw their ratio increase by 4.4%p to 222.7%.

Without the application of transitional measures, the K-ICS ratio of the insurance industry increased to a smaller extent (by 3.6%p) to 201.7% as of late June 2023. The ratio before transitional measures for life insurers climbed by 3.6%p to 196.2%, while there was a rise of 3.8%p to 210% for non-life insurers.

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 is calculated by dividing the insurer’s eligible own funds by the solvency capital requirement, showing the size of the company's capital compared to all the risk it has taken. The lower the ratio, the higher the likelihood that the company will default on its financial obligations.

The amount of insurers' available capital increased by 5.1% to KRW 257.3 trillion before transitional measures as of the end of June 2023, with their required capital expanding by 3.2% to KRW 127.5 trillion. The application of transitional measures resulted in increases of KRW 12.6 trillion in available capital and KRW 3.3 trillion in required capital, bringing the total amounts to KRW 259.5 trillion in available capital and KRW 116.1 trillion in required capital. Thanks to this relief impact of transitional measures, the K-ICS ratio was up by 21.9%p compared to the calculation before the application of transitional measures.

The increase in available capital compared to three months earlier was driven by a decrease in insurance contract liabilities amid rising interest rates and the inclusion of the contractual service margin into available capital. There was a growth in required capital due to increases in market risk and lapse risk.

Insurers in Korea are required by law to maintain the ratio at 100% or above, and their ratios are regularly monitored by the 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.

Solvency Management is of Critical Importance for Insurers

Since January 2023, K-ICS has 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 June 2023, 19 insurers have applied transitional measures, effectively preventing a significant decline in the K-ICS ratio of insurers.

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 solvency 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.