RBC Ratios of the Korean Insurance Industry as of late March 2022
The capital adequacy ratio of insurers in Korea has been falling sharply in the midst of rising interest rates. They saw their average risk-based capital (RBC) ratio decline by 36.8%p quarter on quarter to 209.4% at the end of March 2022 due to market interest rate increases. The average RBC ratio of life insurers dropped by 45.6%p to 208.8%, while the ratio of non-life insurers dipped by 20.9%p to 210.5%.
Amid interest rate hikes, the available capital of insurers as of the end of March 2022 amounted to KRW 136.4 trillion, down 15.6% from three months earlier. Higher interest rates caused insurers to suffer a reduction in unrealized gains on available for sale securities, which cut into the book value of their shareholders’ equity. The yield on ten-year Korea Treasury increased to 2.97% at the end of March 2022 from 2.25% at the end of December 2021. Over the same period, there was a decrease of KRW 23.1 trillion in accumulated other comprehensive income.
In the meantime, insurers saw their required capital decrease by 0.9% to KRW 65.1 trillion as of late March 2022 because their credit and market risk amounts shrank, resulting from a fall in invested assets. Quarter on quarter, total invested assets of insurers decreased by 2.9% to KRW 1,044.5 trillion. However, the insurance risk amount grew in lockstep with an increase in net written premiums.
Given that the RBC ratios of insurers in Korea have been mostly trending down recently, solvency capital management has remained one of the biggest challenges for the insurance industry. Many insurers have been under rising pressure in terms of capital strength, with the implementation of IFRS 17 scheduled for 2023 along with a new risk-based capital (RBC) regime called the Korean Insurance Capital Standards (K-ICS), which will require strengthened capital adequacy. In response, insurers have been exploring various options to boost their RBC ratios by reducing capital requirements or increasing available capital.
Against this backdrop, the Financial Services Commission (FSC) has come up with a measure to help insurers who are struggling with plummeting RBC ratios in the wake of interest rate hikes. In June 2022, the FSC issued a statement that insurers will be allowed to release a portion of their surplus under the Liability Adequacy Test (LAT) and recognize it as available capital when calculating RBC ratios. More specifically, they will be able to add up to 40% of the LAT surplus to their available capital to the extent of losses on the valuation of available for sale securities at a time when interest rates are rising.
The RBC 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 RBC ratio, the higher the likelihood that the company will default on its financial obligations.
Insurers are required by law to maintain the ratio at 100% or above in Korea, and their RBC ratios are regularly monitored by the supervisory authorities. 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 Financial Supervisory Service, which supervises insurance companies in Korea, is responsible for identifying solvency issues of insurers at an early stage and intervening effectively in order to minimize losses to policyholders.