Interest Rates Rising Further... Red Alert on Financial Soundness of Insurance Companies

[Asia Economy Reporter Changhwan Lee] As market interest rates have risen sharply, the financial soundness of insurance companies has deteriorated for the second consecutive quarter. Some insurers are facing the risk of being expelled as their financial soundness fails to meet legal requirements.

Interest rates are likely to continue rising, and from next year, the insurance industry is scheduled to adopt a new accounting standard, highlighting the urgent need for insurers to improve their financial soundness.

According to the Financial Supervisory Service on the 14th, as of the end of last year, the RBC ratio (Available Capital to Required Capital ratio) of insurance companies averaged 246.2%, down 8.3 percentage points from the end of the previous quarter. This marks a decline for two consecutive quarters following the third quarter of last year.

The RBC ratio is an indicator used to measure the financial soundness of insurance companies. The Insurance Business Act mandates maintaining it above 100%, and the Financial Supervisory Service generally guides companies to keep it above 150%.

The decline in insurers' RBC ratios is due to a decrease in available capital, which serves as capital. With rising interest rates, the valuation gains on bonds classified as available-for-sale securities decreased by 800 billion KRW compared to the previous quarter, and the expected cash dividends amounted to 2.2 trillion KRW.

MG Sonhae Insurance was the only insurer with an RBC ratio below the legal standard, at 88.3%. The Financial Services Commission designated MG Sonhae Insurance as a financially distressed institution yesterday and plans to proceed with a public sale process.

Insurers such as Heungkuk Fire & Marine Insurance (155.4%), DB Life Insurance (157.7%), Heungkuk Life Insurance (163.2%), KDB Life Insurance (168.9%), and AXA Sonhae Insurance (169.7%) also had relatively low RBC ratios.

The problem is that with further interest rate hikes expected and changes to insurance accounting standards starting next year, financial soundness is likely to worsen. As inflation intensifies, central banks worldwide are pushing for benchmark rate increases. The Bank of Korea is also highly likely to raise its benchmark rate further.

The introduction of the new accounting standard (IFRS17) next year will also increase the size of liabilities significantly, adding to the burden. Accordingly, some insurers are focusing on proactively raising their RBC ratios through issuing subordinated bonds and asset sales.

A Financial Supervisory Service official stated, "We will strengthen soundness supervision by encouraging preemptive capital expansion when vulnerabilities in RBC ratios are a concern through monitoring market indicators including interest rates."