Insurers Rescued by RBC Ratio... Concerns Over Discriminatory Power

[Asia Economy Reporter Changhwan Lee] Financial authorities have prepared relief measures for insurers whose RBC (Risk-Based Capital) ratios have sharply declined, and the capital soundness of insurers is expected to improve significantly.

In particular, companies such as DGB Life, NH Nonghyup Life, Hanwha General Insurance, DB Life, and Heungkuk Fire & Marine Insurance, whose RBC ratios had fallen below the recommended level of 150%, are expected to benefit greatly.

However, concerns have also been raised that the change in the RBC ratio calculation criteria will reduce the variance among insurers, thereby decreasing the discriminative power regarding capital soundness.

According to the insurance industry on the 17th, the Financial Services Commission plans to apply from the end of this month a measure that recognizes the LAT (Liability Adequacy Test) surplus as available capital in RBC calculations to respond to the decline in insurers' RBC ratios due to rising interest rates.

LAT is a system introduced ahead of the adoption of the new insurance accounting standard (IFRS17) next year, which evaluates insurance liabilities at market value and requires additional reserves for the difference if liabilities exceed cost valuation, thereby enhancing capital soundness.

The Financial Services Commission has allowed insurers to add 40% of the LAT net surplus to available capital within the limit of valuation losses on available-for-sale bonds when calculating the RBC ratio. With the LAT surplus included in available capital, insurers' capital soundness is expected to improve significantly.

This is a buffer measure in response to the recent sharp decline in insurers' RBC ratios. The RBC ratio is an indicator measuring the financial soundness of insurance companies. The Insurance Business Act requires maintaining it above 100%, and financial authorities generally recommend maintaining it above 150%.

With market interest rates soaring this year, the prices of bonds held by insurers fell, causing RBC ratios to plummet. As of the end of the first quarter, the RBC ratios of five companies fell below the recommended level: DGB Life at 84.5%, Hanwha General Insurance at 122.8%, NH Nonghyup Life at 131.5%, DB Life at 139.1%, and Heungkuk Fire & Marine Insurance at 146.7%.

Although market interest rates continued to rise in the second quarter, potentially causing their RBC ratios to fall further, the Financial Services Commission's recent measures are expected to increase their RBC ratios by more than 20%.

Korea Ratings analyzed that the estimated RBC ratios applying the revised calculation criteria are 146% for DGB Life, 202% for NH Nonghyup Life, 210% for Hanwha General Insurance, and 150% for DB Life.

Korea Ratings evaluated the change in calculation criteria positively in that it complements the limitations of the current RBC system. Under the current accounting standard, which values liabilities at cost, when interest rates rise, the decline in the value of interest-bearing assets immediately causes a decrease in net assets, whereas the decline in the value of liabilities is not reflected in the financial statements, resulting in a limitation where the RBC ratio falls.

However, they also analyzed that the change in calculation criteria reduces the comparability of RBC ratios among companies. They pointed out an equity issue where the benefits of the system change only go to some insurers with poor capital management.

Song Mijeong, a senior researcher at Korea Ratings, said, "Companies that have classified a significant portion of securities as held-to-maturity under a conservative risk management strategy have a small amount of valuation losses on available-for-sale bonds (recognized limit) and thus cannot benefit from this system change. On the other hand, companies that reclassified securities accounts (from held-to-maturity to available-for-sale) during the low-interest-rate period and enjoyed an increase in RBC ratios have incurred large valuation losses and can now recognize a significant portion of the LAT net surplus as available capital," she added.

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