Insurance Companies Utilize Internal Statistics When Calculating RBC Interest Rate Risk Amount

[Asia Economy Reporter Oh Hyung-gil] Insurance companies will now be able to calculate the interest rate sensitivity of insurance liabilities based on internal models when determining the interest rate risk amount for the Risk-Based Capital (RBC) ratio.

The Financial Supervisory Service (FSS) announced on the 29th that it will implement the Insurance Business Supervision Rules on the 30th, which include measures to enhance the financial soundness of insurance companies.

First, in preparation for the introduction of the new International Financial Reporting Standard (IFRS 17), the FSS has established detailed standards for calculating the RBC interest rate risk amount related to coinsurance and interest rate derivatives for hedging purposes, enabling insurance companies to proactively prepare for structural improvements in insurance liabilities.

When an insurance company cedes insurance liabilities to a reinsurer through coinsurance, the ceded contract will be deducted from the insurance liability exposure when calculating the RBC interest rate risk amount. Conversely, the reinsurer’s insurance liability exposure will increase.

Additionally, insurance companies will reflect credit risk based on the reinsurer’s creditworthiness for assets transferred to the reinsurer (reinsurance assets) under coinsurance contracts.

Coinsurance is a system that allows the ceding of savings insurance premiums and other amounts to reinsurers or the transfer of risks other than insurance risk, such as interest rate risk, to reinsurers.

Furthermore, detailed standards and procedures will be established to allow insurance companies to calculate the interest rate sensitivity of insurance liabilities based on internal model standards using their own statistics when calculating the RBC interest rate risk amount.

For interest rate derivatives held for hedging purposes, standards will also be set to allow the reduction of interest rate risk amounts by reflecting the exposure and duration of interest rate assets when calculating the RBC interest rate risk amount.

Considering the actual risk and special characteristics of the Securities Market Stabilization Fund, which is operated as a policy measure to stabilize the securities market, a credit and market risk factor of 6% will be applied to the fund’s contribution amount, which is lower than the risk factor for individual stocks (8?12%).

An FSS official explained, "In response to the introduction of IFRS 17, coinsurance and interest rate derivatives for hedging purposes have been reflected in the calculation of interest rate risk amounts to enable insurance companies to proactively prepare for structural improvements and interest rate risk management of insurance liabilities. Detailed standards related to the application of internal models for interest rate sensitivity of insurance liabilities have been established to enhance insurance companies’ risk management capabilities."

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