Sharing High-Interest Savings Insurance Risks with Reinsurers

[Asia Economy Reporter Oh Hyung-gil] Insurance companies will be able to retrocede high-interest savings insurance policies sold in the past to reinsurers. It is expected that life insurance companies will be able to reduce the high-interest rate risk they have been carrying.

On the 30th, the Financial Services Commission, chaired by Vice Chairman Son Byung-du, held the 4th meeting of the Insurance Capital Soundness Advancement Task Force and decided to introduce a joint reinsurance system that allows insurance companies to reduce and adjust insurance liabilities.

Joint reinsurance is a system where insurance companies retrocede not only risk premiums but also savings premiums to reinsurers, transferring interest rate risk in addition to insurance risk to reinsurers. Japan imposes regulations only on some areas such as financial reinsurance, while broadly allowing other joint reinsurance transactions.

Until now, life insurers have issued subordinated bonds or expanded investments in long-term government bonds to increase capital, but have borne interest rate risk due to low interest rates.

In particular, due to low interest rates, the issuance interest rates of subordinated bonds by insurers have risen, limiting the effect of capital expansion.

Therefore, it is expected that financial soundness can be improved by transferring interest rate risk to reinsurers through joint reinsurance. Life insurers will be able to decide appropriately by comparing costs such as reinsurance premiums under joint reinsurance and costs of other means such as subordinated bond issuance.

The financial authorities expect that the introduction of joint reinsurance will allow the utilization of know-how from foreign reinsurers. If global reinsurers have excellent asset management capabilities, it is explained that asset management returns can be improved through global resource allocation.

The Financial Services Commission plans to revise the Insurance Business Supervision Regulations considering the institutional characteristics of joint reinsurance transaction methods. In addition, it plans to clarify accounting treatment methods by revising the Insurance Business Supervision Regulations and Enforcement Rules.

Through joint reinsurance transactions, the portion of interest rate risk transferred to reinsurers will be excluded when calculating insurers' interest rate risk, or the system will be improved by adding credit risk to insurers due to the transfer of operating assets to reinsurers.

A Financial Services Commission official said, "We plan to review whether the scale of capital expansion or insurance liabilities is being artificially reduced through joint reinsurance," adding, "We will also examine the appropriateness of transactions to see if risks are actually shared jointly."

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