Capital management of South Korea insurers are expected to continue to feel pressured due to the implementation of new standards, such as Korean-Insurance Capital Standards (K-ICS) and IFRS 17, according to a recent report by AM Best.
The agency’s report revealed that the implementation of more stringent risk measurement under K-ICS, enacted in January 2023, has led to a decline in the average solvency ratio for the country’s insurance industry
This, alongside the adoption of IFRS 17 accounting standards, “will likely remain a major factor affecting the capital and business strategies of the country’s insurers,” AM Best stated.
The new standards replace South Korea’s previous risk-based capital (RBC) regime with a more accurate and comprehensive risk management approach, which aims to better align with global best practices and standards.
Seokjae Lee, financial analyst, AM Best, said: “This is unlike the previous RBC regime, under which assets were measured at market value while liabilities were booked on a cost basis.
“Other key changes under K-ICS include the introduction of new risk categories, such as longevity, lapse, expense, catastrophe and asset concentration risks.”
According to the report, “the economic value approach and more stringent risk measurement of K-ICS are expected to exert downward pressure on insurers’ solvency ratio, in contrast with the previous regime. The pressure could be worse for insurers with relatively weak asset liability management.”
However, analysts noted that the elevated level of interest rates the market is currently experiencing, coupled with insurers’ continued efforts to improve asset liability management in recent years, could help mitigate the solvency pressure under the new regime.
“The transitional measures introduced by the country’s Financial Supervisory Service for a soft landing of K-ICS have helped some insurers avoid a substantial drop in their solvency ratio at the time of transition,” Lee said.
The report found that the adoption of K-ICS has affected the operational strategies of Korean insurers in a variety of ways, in their efforts to secure sufficient available capital while keeping risk at an acceptable level.
Regarding life and non-life insurance companies, they have been focusing on expanding their sales of protection type products with high contractual service margin (CSM) profitability.
Additionally, as the CSM, which is a liability on the balance sheet, is being amortised and realised as profits over time, it will ultimately contribute to organic growth of capital under IFRS 17.
As assets and liabilities are measured at market value under K-ICS, a narrower duration gap would reduce the sensitivity of insurers’ solvency positions to interest rate movements, according to the report.
