Improvement in Insurers' Capital Soundness... Relief Brought by Regulatory Support

Source: Financial Supervisory Service

[Asia Economy Reporter Changhwan Lee] The RBC (Risk-Based Capital) ratio of domestic insurance companies rose in the second quarter, alleviating concerns about capital soundness. This was due to the financial authorities hastily establishing a buffer as the rapid rise in interest rates this year raised the possibility of many insurers falling below the statutory RBC ratio.

According to the Financial Supervisory Service on the 26th, the average RBC ratio of domestic insurance companies at the end of the second quarter this year was 218.8%, up 9.4 percentage points (p) from the end of the previous quarter.

By sector, the RBC ratio of life insurance companies was 216.2%, up 7.4%p from the previous quarter, while non-life insurance companies rose 12.7%p to 223.2%.

The RBC ratio is a measure of an insurance company's financial soundness, calculated by dividing available capital by required capital. The Insurance Business Act mandates maintaining it above 100%, and generally, a ratio above 150% is recommended.

This year, the rapid increase in the base interest rate led to increased bond valuation losses, putting some insurers at risk of falling below the statutory RBC ratio. However, the situation improved thanks to the financial authorities' establishment of a buffer.

The Financial Services Commission and the Financial Supervisory Service have applied a measure since the end of June to recognize the LAT (Liability Adequacy Test) surplus as available capital within the RBC calculation to counter the decline in insurers' RBC ratios due to rising interest rates.

LAT is a system introduced ahead of the new insurance accounting standard (IFRS17) implementation next year, which evaluates insurance liabilities at market value. If liabilities exceed cost valuation, the difference must be additionally reserved to enhance capital soundness.

The Financial Services Commission allowed insurers to add 40% of the LAT net surplus to available capital within the limit of available-for-sale bond valuation losses, thereby increasing capital capacity.

As a result, available capital of domestic insurers reached KRW 144.1 trillion at the end of the second quarter, an increase of KRW 7.7 trillion from the previous quarter. Although other comprehensive income including bond valuation losses due to rising interest rates decreased by KRW 23.4 trillion, the LAT surplus increased by KRW 33.3 trillion, improving the capital situation.

With LAT surplus recognized as available capital and implementation of self-help measures such as paid-in capital increases and asset sales, the capital soundness of some insurers previously of concern greatly improved.

DGB Life Insurance's RBC ratio rose from 84.5% at the end of the first quarter to 165.8% at the end of the second quarter. During the same period, NH Nonghyup Life Insurance improved from 131.5% to 184.6%, KDB Life Insurance from 158.8% to 199.6%, and KB Non-Life Insurance from 162.1% to 197.3%.

However, some insurers such as MG Non-Life Insurance at 74.2%, Hanwha Non-Life Insurance at 135.9%, Carrot Non-Life Insurance at 149.1%, DB Life Insurance at 150.2%, Heungkuk Fire & Marine Insurance at 154%, and Heungkuk Life Insurance at 157.8% still had relatively low RBC ratios.

A Financial Supervisory Service official stated, "As of the end of June, the average RBC ratio of insurance companies is at a healthy level, exceeding the regulatory ratio of 100% by more than twice," adding, "We plan to strengthen soundness supervision by inducing proactive capital expansion in preparation for potential risks such as continued interest rate hikes."

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