Insurance Companies' RBC Plummets, Second Half Poses Greater Challenges

Concerns Over Insurers' Capital Soundness Grow Amid Interest Rate Hikes

[Asia Economy Reporter Changhwan Lee] As market interest rates rise, insurance companies' RBC (Risk-Based Capital) ratios have significantly declined, putting the insurance industry on alert. Some insurers may fail to meet the regulatory recommendation of 150%.

There are also concerns that as interest rates are likely to rise further in the second half of the year, some companies may not be able to meet the legal minimum standard of 100%.

On the 12th, Korea Ratings analyzed that a total of seven companies, including DGB Life, Hanwha General Insurance, NH Nonghyup Life, Heungkuk Fire & Marine Insurance, DB Life, Heungkuk Life, and KDB Life, could see their RBC ratios fall below 150% this year.

The RBC ratio is an indicator used to measure the financial soundness of insurance companies. The Insurance Business Act requires maintaining it above 100%, while financial authorities generally recommend keeping it above 150%.

The decline in RBC ratios is due to the recent sharp rise in market interest rates. When market interest rates increase, the prices of bonds held by insurers fall, reducing their capital and thus lowering the RBC ratio.

Having an RBC ratio below 150% does not immediately trigger sanctions from financial authorities. However, companies may receive recommendations to raise their RBC ratios again and will be subject to continuous monitoring by regulators, which can be a significant burden.

If the RBC ratio continues to decline, it may become difficult for insurers to develop and launch new insurance products, causing operational issues.

In response to the sharp drop in RBC ratios, insurers are expanding their capital through issuing capital securities and asset sales. According to Korea Ratings, insurers issued a total of 2.3 trillion KRW worth of subordinated bonds and hybrid capital securities by April this year.

The problem is that capital securities also have issuance limits, and companies that have exhausted these limits may find it difficult to raise additional capital. Korea Ratings assessed that KDB Life, Heungkuk Fire & Marine Insurance, Heungkuk Life, and DGB Life have nearly exhausted their legal issuance limits for capital securities, making a further decline in their RBC ratios highly likely.

Moreover, additional interest rate hikes are expected in the second half of the year, which could further lower bond prices and worsen insurers' capital soundness. There are concerns that if the interest rate hike trend continues, more insurers may see their RBC ratios fall below the legal minimum.

Financial authorities are also taking this situation seriously and have begun preparing countermeasures. On the 22nd of last month, the Financial Supervisory Service (FSS) held a meeting on the decline of RBC ratios with insurance company CEOs, chaired by Senior Deputy Governor Chanwoo Lee.

At that time, insurance CEOs requested regulatory relief measures such as the early introduction of the new solvency regime (K-ICS). It is known that the introduction of K-ICS will change accounting standards and improve insurers' capital soundness.

An FSS official said, "The RBC ratios of insurers are declining faster than expected, and we are internally considering various measures. We plan to continue discussions with related ministries such as the Financial Services Commission."

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