New System Introduced, but KDB, Fubon, and MG Still Struggling with Soundness

Despite Grace Period, Recommendation Level Falls Below 150%
Overall Insurers at 219% 'Holding Up'... Thanks to Transitional Measures
FSS "Will Continue Thorough Management and Supervision"

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Despite the introduction of the new solvency indicator 'New Solvency Capital Requirement System (K-ICS)' this year, aimed at more realistically reflecting the actual situation of insurers, some companies such as KDB Life, Fubon Hyundai Life, and MG Insurance still posted first-quarter solvency results below the regulatory recommended level.

Three Companies Below Recommended Level Even Under New System

According to the Financial Supervisory Service's 'Status of Insurance Companies' Solvency Ratios as of the End of March 2023' released on the 10th, insurers with K-ICS ratios below the regulatory recommended level of 150% were KDB Life (101.7%), Fubon Hyundai Life (128.3%), and MG Insurance (82.6%).

K-ICS is a newly established solvency evaluation indicator that, unlike the previous solvency (RBC) ratio which valued some assets and liabilities at cost, evaluates all assets and liabilities at market value.

The ratios before the Financial Supervisory Service applied the 'transitional measures' that temporarily defer the application of the New Solvency Capital Requirement System (K-ICS) to facilitate system stabilization were even lower. KDB Life stood at 47.7%, MG Insurance at only 65.0%, and Fubon Hyundai Life was recorded as low as -0.6%.

However, in the case of Fubon Hyundai Life, the decrease in net assets is interpreted as resulting from applying market valuation amid a large duration gap between assets and liabilities. The Financial Supervisory Service added that Fubon Hyundai Life is expected to increase this ratio through recent capital increases and issuance of hybrid capital securities.

Additionally, companies such as Heungkuk Life (105.4%), IBK Pension Insurance (68.7%), Hana Life (117.4%), ABL Life (111.4%), Lotte Insurance (137.7%), and Heungkuk Insurance (132.3%) also had solvency ratios below 150% before the application of transitional measures.

Industry Overall 'Holding Up' at 219%... Thanks to Transitional Measures

After applying the transitional measures, the overall K-ICS ratio of all insurers was 219.0%, up 13.1 percentage points from the year-end RBC ratio of 205.9%. Specifically, life insurers recorded 219.5% and non-life insurers 218.3%, rising 13.1 and 13.2 percentage points respectively compared to the year-end RBC ratios. Nineteen insurers applied for the transitional measures among all insurance companies.

The K-ICS ratio is calculated by dividing available capital by required capital. The increase in the K-ICS ratio this time is attributed to an increase in available capital and a decrease in required capital. According to the Financial Supervisory Service, available capital of insurers increased by 2.1 trillion KRW in the first quarter of this year due to transitional measures for capital reduction. Required capital decreased by 10.8 trillion KRW due to transitional measures for new risks.

The K-ICS ratio of companies applying transitional measures rose by 79.1 percentage points compared to before application. Available capital increased by 1.9 trillion KRW due to transitional measures for capital reduction from market valuation of assets and liabilities, while required capital decreased by about 9.3 trillion KRW as transitional measures were applied to insurance, equity, and interest rate risk amounts.

Provided by Financial Supervisory Service

Still Challenging Without Transitional Measures... "Strict Supervision"

However, the K-ICS ratio before applying transitional measures was 198.1%, down 7.8 percentage points from the year-end RBC ratio. Life insurers recorded 192.7%, a 13.8 percentage point decrease during the same period, while non-life insurers recorded 206.2%, a 1.0 percentage point increase.

This is interpreted as the required capital increasing at a higher rate than the available capital. As of the first quarter of this year, available capital before applying transitional measures was 244.9 trillion KRW. This is a 75.3% (105.1 trillion KRW) increase compared to the available capital of 139.7 trillion KRW under the RBC ratio.

The increase in net assets was due to the decline in the 10-year government bond yield and the inclusion of the new profitability indicator Contractual Service Margin (CSM), which was not included in available capital under RBC. CSM is a concept that recognizes future profits generated from insurance contracts annually over time.

Required capital before applying transitional measures was 123.6 trillion KRW, an 82.0% (55.7 trillion KRW) increase compared to the year-end RBC required capital of 67.9 trillion KRW. This is analyzed as a result of reflecting new insurance risks (longevity, lapse, expense, catastrophe, etc.) and an increase in confidence level (from 99.0% to 99.5%).

The Financial Supervisory Service plans to strengthen supervision by proactively encouraging capital expansion to prepare for potential risks such as recent economic conditions and increased interest rate volatility, although the K-ICS ratio with transitional measures applied is stable. In particular, it intends to strictly manage companies that selectively apply transitional measures. A Financial Supervisory Service official stated, "We will review the appropriateness of the CEO verification reports submitted quarterly by all companies applying transitional measures," and added, "For companies with K-ICS ratios below 100% before applying transitional measures, we will review the appropriateness of improvement plans submitted after board reporting and manage their implementation annually."

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