[Song Seungseop's Financial Light] How Did MG Sonbo Become a Troubled Financial Company?

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[Asia Economy Reporter Song Seung-seop] The Financial Services Commission has designated MG Insurance as a distressed financial company. Considering both domestic and international circumstances, it has been officially labeled as a financial company facing difficulties in normal management. MG Insurance, which started in 1947 under the name International Non-Life Reinsurance Company, how did it become a distressed financial institution? What impact will this have on my insurance?

The main reason MG Insurance was judged as a distressed financial company is ‘debt.’ According to the financial authorities, as of the end of February, MG Insurance’s debt exceeded its assets by 113.9 billion KRW. Last year, the net loss was 62 billion KRW, and the Risk-Based Capital ratio (RBC) was 88.3%. An RBC below 100% means the insurer may have difficulty paying insurance claims to customers on time. It is also lower than the regulatory recommendation of 150%.

There are various interpretations for the high debt. Industry insiders point out that MG Insurance sold many ‘products with a high possibility of deficit.’ In other words, they sold many inexpensive products despite having large coverage. In July last year, MG Insurance’s automobile insurance loss ratio reached 134.5%. This means that for every 1 million KRW in premiums received, they paid out 1.345 million KRW to customers.

In response, the financial authorities have consistently recommended increasing capital, but since MG Insurance failed to properly implement this, it was judged difficult to expect management normalization. The Financial Services Commission issued a ‘Management Improvement Request’ in July last year and a ‘Management Improvement Order’ in January this year to induce self-normalization. They instructed MG Insurance to complete capital expansion by February to March.

MG Insurance responded that it would raise an additional 36 billion KRW in March and 90 billion KRW in June, but the Financial Services Commission did not accept this. The reason was that the scale was small and no specific method for raising the funds was presented. Last year, MG Insurance also announced plans to secure an additional 30 billion KRW and 120 billion KRW in capital, but in reality, only 20 billion KRW was secured.

Designation as a Distressed Financial Company: What Does It Mean for My Insurance?

When a company becomes a distressed financial institution, it comes under direct supervision by financial authorities. The government may directly sell the company or inject public funds. The Financial Services Commission has already announced the formation of a management team consisting of three members from the Financial Supervisory Service, one from the Korea Deposit Insurance Corporation, and one from MG Insurance. Procedures such as public sale will also be carried out. While injecting public funds may draw criticism for using taxpayers’ money on a distressed financial company, the financial authorities’ official position is that no decision has been made yet.

Of course, becoming a distressed financial institution does not mean MG Insurance will immediately stop operations. Customers can continue to pay premiums and maintain their insurance contracts. However, if premiums are unpaid, contracts may be canceled and insurance claims may not be paid.

The key issue is the direction of the sale. The best scenario is that a company willing to buy MG Insurance appears and a successful sale is completed. Only the ownership changes, and existing contracts remain intact. However, if the sale fails and contract transfer (transferring existing contracts to another company) is pursued, contract terms may change, such as coverage amounts.

Because of the significant impact on customers, MG Insurance’s major shareholder ‘JC Partners’ strongly opposes the financial authorities’ measures. They argue that with the new accounting standard (IFRS17) to be introduced next year, MG Insurance does not meet the criteria for designation as a distressed financial institution. They also added that even under current standards, there are conditions to significantly increase net assets.

Accordingly, JC Partners has filed a lawsuit against the financial authorities to cancel the designation of MG Insurance as a distressed financial institution.

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