Insurance Companies' Capital Adequacy Worsens in Q1... Improvement Expected in Q2

[Asia Economy Reporter Changhwan Lee] The RBC (Risk-Based Capital) ratio of domestic insurance companies in the first quarter showed a significant decline.

According to the Financial Supervisory Service on the 29th, the average RBC ratio of domestic insurance companies at the end of the first quarter this year was 209.4%, down 36.8 percentage points from the previous quarter.

By sector, the RBC ratio of life insurance companies was 208.8%, down 45.6 percentage points from the previous quarter, while non-life insurance companies saw a decrease of 20.9 percentage points to 210.5%.

The RBC ratio is an indicator used to measure the financial soundness of insurance companies. The Insurance Business Act requires it to be maintained above 100%.

The decline in the RBC ratio was due to a sharp rise in market interest rates in the first quarter. When market interest rates rise, the prices of bonds held by insurance companies fall, reducing their capital and thus lowering the RBC ratio.

The 10-year government bond yield rose from 1.71% at the end of 2020 to 2.25% at the end of December 2021, and further to 2.97% at the end of March this year.

Due to the interest rate increase, the available capital of insurance companies at the end of the first quarter was 136.4 trillion KRW, down 25.3 trillion KRW from the previous quarter.

However, the Financial Supervisory Service expects a significant improvement in insurance companies’ RBC ratios as a buffer plan for the RBC ratio is scheduled to be implemented.

The Financial Services Commission and the Financial Supervisory Service plan to apply a measure from the end of this month that recognizes the LAT (Liability Adequacy Test) surplus as available capital for RBC purposes in response to the decline in insurance companies’ RBC ratios caused by 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 any excess liabilities compared to cost evaluation, thereby enhancing capital soundness.

The Financial Services Commission allows insurance companies to add 40% of the LAT net surplus to available capital within the limit of available-for-sale bond valuation losses when calculating the RBC ratio. With the LAT surplus included in available capital, insurance companies’ capital soundness is expected to improve significantly.

The Financial Supervisory Service stated that it will strengthen soundness supervision, including proactive capital expansion inducement, to prepare for increased volatility in financial markets going forward.

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