Implementation of the New Solvency Regime (K-ICS) Next Year... Sanctions Deferred Until 2027 (Comprehensive)

Five-Year Grace Period for Corrective Actions After Implementation
Capital Increase Burden... Insurance Companies Breathe a Sigh of Relief

[Asia Economy Reporter Oh Hyung-gil] With the introduction of the new solvency regime (K-ICS) scheduled for next year, securing financial soundness has become a key issue in the insurance industry. This is because the new system evaluates liabilities at market value, which significantly reduces the solvency (RBC) ratio. However, since sanctions are expected to be deferred until 2027, insurers have been able to breathe a sigh of relief for the time being.

According to the financial industry on the 14th, the Financial Supervisory Service recently released a provisional plan for the introduction standards of K-ICS. The biggest difference between this provisional plan and the previous one (K-ICS 4.0) is the application of transitional measures.

K-ICS, introduced in accordance with the new International Financial Reporting Standards (IFRS17), is a new capital regulation different from the existing RBC ratio, with its most notable feature being the calculation of solvency based on market value. Solvency refers to whether an insurer holds reserves exceeding the insurance claims it must pay to policyholders. Under the current Insurance Business Act, it is mandated to maintain this at 100% or above.

Solvency is calculated by dividing available capital by required capital. Under K-ICS, capital is evaluated based on market value rather than the existing cost basis, meaning it is revalued at current interest rate levels. This situation requires insurers to accumulate more available capital.

Accordingly, the provisional plan recognizes hybrid capital securities issued under the existing RBC system as basic capital up to 15% of total required capital for all insurers during the transitional period. Additionally, the portion of hybrid capital securities exceeding the basic capital limit and subordinated bonds are recognized as supplementary capital, reducing the burden on insurers to increase capital.

Furthermore, for insurers who have pre-registered, a buffer period has been established during the transitional period to gradually recognize the increase in reserves due to market value evaluation of liabilities and the burden related to insurance, equity, and interest rate risks. This transitional period will last 10 years, from January 1, next year, to December 31, 2032.

In particular, even if the solvency ratio under K-ICS falls below 100%, if the solvency ratio under the existing RBC standard exceeds 100%, the application of prompt corrective action will be deferred. The deferral period is about five years, until the end of December 2027. However, during this period, the insurer must enter into a management improvement agreement with the Financial Supervisory Service and report on its implementation status.

Jeong Eun-bo, Governor of the Financial Supervisory Service, is delivering opening remarks at the 'Life Insurance CEO Meeting' held on the 25th at the Millennium Hilton Seoul Hotel in Jung-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

The insurance industry evaluates that the transitional measures have eased the regulatory burden. Previously, Basel III for banks and Solvency II in Europe each successfully introduced their systems based on transitional measures lasting up to 10 and 16 years, respectively.

In a recent report, Korea Credit Rating stated, "Regulatory risk has somewhat eased," but added, "Although the possibility of insurers falling below capital regulation levels based on transitional measures has decreased, the actual financial soundness of individual companies remains unchanged, so downward pressure on the credit ratings of insurers facing regulatory burdens will continue."

Meanwhile, the RBC ratios of insurers have been on a downward trend recently due to rising interest rates and falling stock prices. As of the third quarter of last year, the average RBC ratio of domestic insurers was 254.5%, down 6.4 percentage points from the end of the previous quarter.

The life insurance RBC ratio was 261.8%, down 11.1 percentage points from the previous quarter. The lowest figure was recorded by DB Life. DB Life's RBC ratio fell 6.2 percentage points during the same period to 155.3%. Kyobo Lifeplanet showed the largest decline, with its RBC ratio dropping 77.3 percentage points to 335.4% during the same period.

The non-life insurance RBC ratio rose 2.3 percentage points from the previous quarter to 241.2%. Hyundai Marine & Fire Insurance recorded a 12.1% increase to 209.0%. DB Insurance and KB Insurance rose 1.8 and 3.1 percentage points to 213.0% and 181.8%, respectively. Samsung Fire & Marine Insurance fell 7.7 percentage points to 314.7%. MG Non-Life Insurance had the lowest RBC ratio among all insurers at 100.9%.

This content was produced with the assistance of AI translation services.