FSS Summons Insurers Over Middle East Crisis: "Strengthen Soundness Management, Minimize Coverage Gaps"

Emergency Meeting on Insurer Risks Related to the Middle East

"Thorough Management of Asset Soundness, Including Overseas Real Estate"

"Liquidity Measures to Be Prepared for Settlement Delays if Needed"

As tensions in the Middle East persist, increasing uncertainty in financial markets, the Financial Supervisory Service called in 14 insurance companies to examine their financial soundness and to check for potential coverage gaps in insurance products for local businesses and vessels.

Main Building of the Financial Supervisory Service in Yeouido, Seoul. Financial Supervisory Service

On March 12, the Financial Supervisory Service announced that Vice Governor for Insurance Jisun Park held an emergency meeting with CFOs from 14 insurance companies to conduct a thorough assessment of how increased market volatility stemming from the situation in the Middle East could impact the financial soundness of insurers.

Vice Governor Park emphasized the need for thorough preparations, noting that as of the end of September last year, bonds, beneficiary certificates, and other marketable securities accounted for 70.9% of total assets in the insurance sector. Marketable securities are assets that are highly susceptible to market volatility.

She pointed out that, if the situation in the Middle East deteriorates, several risks could materialize independently, including the impairment of overseas alternative investments, downward pressure on the capital adequacy ratio (K-ICS), and increased currency hedging costs along with refinancing risks.

She instructed insurance companies to strengthen their loss-absorption capacity by conservatively managing asset soundness.

She also advised them to establish step-by-step crisis response strategies under worst-case scenarios, such as minimizing the impact of interest rate risk through comprehensive asset-liability management (ALM), including management of duration gaps.

She stressed the need to enhance the verification of actuarial assumptions so that insurance products are meticulously managed from the design stage. She cautioned against "stretch accounting," which involves adopting overly optimistic actuarial assumptions to inflate initial contract profits and overstate the contractual service margin (CSM).

She recommended that transparent management of financial information, such as managing the actual-to-expected ratio, should be reflected in performance evaluation indicators (KPIs) when positive results are achieved.

She announced a strict crackdown on disorderly conduct that undermines consumer trust and negatively affects financial soundness, such as excessive commission rates and aggressive competition for recruiting insurance agents (FCs) with large settlement bonuses.

Meeting participants also held in-depth discussions on insurance coverage for Korea-affiliated businesses and vessels in the Middle East, as well as plans for insurance payouts.

Insurance companies explained that, if the situation in the Middle East continues, they may cancel existing policies or enter into new insurance contracts for domestic vessels currently anchored in the Persian Gulf inside the Strait of Hormuz.

The Financial Supervisory Service stated that, in the event of large-scale losses, it would consider implementing measures as needed to prevent liquidity shortages at insurers caused by settlement delays between primary domestic insurers and overseas reinsurers.

Insurance companies plan to strengthen financial support to prevent coverage gaps for Korea-affiliated businesses in the Middle East.

They also committed to promptly paying insurance claims to affected companies and small business owners, and to establishing emergency consultation channels for overseas residents, such as expatriates and travelers.

A Financial Supervisory Service official stated, "The Financial Supervisory Service plans to proactively respond by identifying various risk factors early, in preparation for the possibility that the situation in the Middle East may be prolonged. We will establish an emergency contact system between the Financial Supervisory Service and the insurance industry, and assess the adequacy of each insurance company's own crisis response plan."

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