Korea Ratings: Insurance Companies' Capital Adequacy Ratios Worsen Due to Falling Interest Rates and Regulatory Tightening
A recent analysis found that a significant number of insurance companies saw a decline in their capital adequacy ratio (K-ICS, KICS) in the first quarter, due to falling interest rates and the impact of regulatory tightening.
On May 27, Korea Ratings stated in a report, "As regulatory tightening measures, such as the adjustment of the liability discount rate, have increased the capital management burden across the industry, companies with high interest rate sensitivity in their KICS ratios are likely to have experienced a sharp decline in their KICS ratios due to the additional impact of falling interest rates."
Korea Ratings also projected, "With market interest rates continuing to decline in the second quarter, the negative effects of falling rates are expected to persist for the time being." Typically, insurance companies see their financial structure deteriorate when interest rates fall.
In particular, Korea Ratings pointed out that among small and mid-sized insurers whose KICS ratios are close to the 150% level and whose interest rate sensitivity is high (a decrease of more than 10 percentage points per 50 basis points), it is necessary to review their capital raising strategies. The agency also explained, "Even if a company maintains a strong KICS ratio, if its interest rate sensitivity is extremely high, the volatility in the KICS ratio due to interest rate fluctuations will also be very large."
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Additionally, Korea Ratings emphasized that asset-liability management (ALM) has become more important than ever, and projected that asset management strategies to extend asset duration?such as increased purchases of long-term domestic and overseas bonds, and greater use of derivatives like government bond forwards?will be implemented more actively. The agency also expects increased use of joint reinsurance to reduce exposure to interest rate risk.
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