Financial Services Commission Eases RBC Regulations for Insurers... Recognizes LAT Surplus as Capital

[Asia Economy Reporter Song Hwajeong] Financial authorities have decided to support insurance companies whose financial soundness is deteriorating due to rising interest rates. They will recognize the surplus from the Liability Adequacy Test (LAT) as available capital in the Risk-Based Capital (RBC) ratio.

On the 9th, the Financial Services Commission held an 'Insurance Sector Risk Review Meeting' chaired by the Secretary-General and made this decision.

Due to the nature of insurance companies having a high proportion of bonds among their operating assets, the recent sharp rise in market interest rates has caused large-scale bond valuation losses, leading to a decline in the RBC ratio, an indicator of insurers' soundness. In response, financial authorities decided to apply a measure recognizing the LAT surplus (cost-based insurance liabilities minus LAT insurance liabilities valuation) as available capital in the RBC calculation. LAT is a system introduced to prepare for the implementation of IFRS17, which calculates market value-based insurance liabilities reflecting discount rates at the balance sheet date, and requires additional reserves if these exceed cost-based liabilities.

The Financial Services Commission explained, "The current RBC system based on 'asset market valuation minus liability cost valuation' reflects only asset (bond) valuation losses as a reduction in available capital when interest rates rise, causing the RBC ratio to fall. However, applying this measure will also reflect the actual decrease in insurance liabilities due to rising interest rates as an increase in available capital, balancing the effect and cushioning the RBC decline."

With this cushioning measure, insurance companies can add 40% of the LAT surplus to available capital within the limit of valuation losses on available-for-sale bonds.

The Financial Services Commission considered that during periods of falling interest rates, 40% of the LAT additional reserves, which represent increases in insurance liabilities, are deducted from available capital. Therefore, during periods of rising interest rates, 40% of the LAT surplus will symmetrically be reflected as an increase in available capital. Also, since valuation losses on available-for-sale bonds, which insurers operate to match long-term insurance liabilities, are the main cause of the recent RBC ratio decline, only these losses will be offset accounting-wise.

The Financial Services Commission expects that applying this cushioning measure will allow insurers whose RBC ratios have recently fallen to exceed 100%, enabling them to maintain stable financial soundness.

The RBC cushioning measure will be applied starting from the RBC calculation as of the end of June, following a notice of regulatory changes (June 9?20) and approval by the Financial Services Commission.

Additionally, the Financial Services Commission will strengthen monitoring of insurers' foreign currency liquidity and alternative investments with default risk to ensure insurers are well-prepared for risks through close management and supervision. Furthermore, since the new solvency regime (K-ICS), which will precisely measure insurers' risks, is scheduled to be introduced from 2023, quantitative impact assessments will continue. For insurers with low capital adequacy, capital expansion through rights offerings and other means will be encouraged.

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