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Korean Insurance Capital Standard to have limited impact: Fitch Ratings

26th August 2022 - Author: Pete Carvill

Fitch Ratings has said that the implementation of the Korean Insurance Capital Standard (K-ICS) starting 2023 is likely to have a limited impact on insurers’ ratings, although the new capital regime, together with IFRS 17, will squeeze their capital buffers.

South Korea FlagThe K-ICS comes into force from the beginning of next year. In May, Moody’s predicted that insurers will accelerate their capital securities issuances to meet the new capital requirements.

Their local risk-based capital (RBC) ratios could drop further because of rapidly rising interest rates, but their solvency under K-ICS and IFRS 17 will benefit from the rising rates because of asset-liability duration mismatches.

Meanwhile, Fitch has said that the K-ICS will not materially change the underlying risk structure or fundamental business profile of insurance operations.

Fitch expects the regime to have an impact on capital buffers as both assets and liabilities will be measured at market value. Still, it said the effect could be tempered by a decrease in the market value of insurance liabilities, especially in the current rising interest-rate environment, for policies whose inception rate is lower than current levels.

Stratumn, by SIA Partners

Writing in a note, Fitch said: “We expect no significant changes to the investment mix, although there could be some refinements to mitigate the effect of the latest risk changes under the K-ICS. We think insurers have been allocating a portion of their funds to higher-yielding alternative investments in the last few years to diversify their portfolios and enhance absolute returns.”

It added: “The Korean regulator, in a bid to implement the K-ICS smoothly, recently permitted insurers to recognise up to 40% of their reserve surplus under the liability adequacy test up to the limit of their losses on valuation of bonds available for sale, which could provide some buffers to withstand falling local risk-based capital ratios.

“Insurers could also consider coinsurance, a fairly new concept, to pre-emptively manage their capitalisation in response to the introduction of K-ICS. There is currently limited public information about the impact and industry results of K-ICS, and our assessment may be revised, depending on any refinements in the regulator’s guidelines.”

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