'Uncertainty' Hits Major Insurers... Considering Postponement of Soundness Indicators Based on 'Market Value'

K-ICS Implementation Grace Period 'Transitional Measures' Large Companies Also Consider Applying
Concerns Over Economic Uncertainty... Willing to Endure Inconvenience for a Smooth Landing

There is a growing trend of not only small and medium-sized insurers but also relatively capable mid-sized and large insurers applying for the transitional measures that temporarily defer the application of the new solvency evaluation indicator for insurance companies, the 'New Solvency Capital Requirement System (K-ICS).' This is interpreted as an attempt to take a conservative approach due to concerns about uncertainties arising from the introduction of the new indicator.

According to the industry on the 27th, the Financial Supervisory Service (FSS) is accepting applications for the K-ICS transitional measures until the end of this month. Unlike the past solvency ratio (RBC) which evaluated some assets and liabilities at cost, K-ICS evaluates all assets and liabilities at market value. Therefore, since insurers' solvency indicators may temporarily decline, a mechanism has been put in place to allow K-ICS to be phased in more smoothly with some leeway.

If an insurer applies for the K-ICS transitional measures, they can gradually reflect the increase in insurance liabilities due to market value evaluation, the decrease in solvency capital, and the increase in risk amounts newly added or with strengthened measurement standards over up to 10 years instead of recognizing them all at once. Additionally, even if the K-ICS ratio is below 100% after applying the transitional measures, the 'prompt corrective action' to secure solvency quickly will be deferred for up to 5 years as long as the RBC ratio exceeds 100%.

For small and medium-sized insurers whose K-ICS ratio may be lower than the RBC ratio, applying for the transitional measures is practically essential. On the other hand, it has been reported that large insurers with solvency capacity under the new system are also considering applying for the transitional measures. A representative from an insurance company said, "I understand that not only small and medium-sized insurers but also large insurers are paying attention," adding, "Some large insurers have already decided to apply and are preparing internally."

However, the transitional measures are not entirely beneficial. If applied for, dividends are restricted, and insurers must periodically submit various reports such as adequacy verification reports to the authorities. Disclosure of the application of transitional measures is required, and the upper limit of the management evaluation rating is also restricted. Nevertheless, large insurers are considering applying for the transitional measures due to uncertainty. Noh Geon-yeop, a research fellow at the Korea Insurance Research Institute, explained, "The transitional measures are practically equivalent to prompt corrective action, so insurers inevitably face various restrictions," adding, "Because interest rate volatility is high and economic uncertainties are significant, it seems they are making conservative decisions to buy time to adapt to the new system."

In fact, similar situations occurred overseas. When the European Union (EU) introduced the insurance solvency indicator 'Solvency II,' a similar transitional measure system was operated. As of the end of 2017, 168 insurers applied the transitional measures, but 82.7% (139 companies) of them did not lack capital even without applying the transitional measures. Nevertheless, many applied to pursue more stable investment policies and to prepare for unexpected situations.

However, there are concerns that indiscriminate applications could cause side effects. Research fellow Noh pointed out, "If the actual economic conditions of insurers are not properly reflected, an unfair competitive environment could arise between companies applying the transitional measures and those not applying them," adding, "Consistency in approval is important domestically as well, and thorough monitoring of disclosure and internal control processes is necessary."

A financial authority official said, "(The applications from large insurers) somewhat differ from the original purpose of the system, but since there are no separate eligibility criteria, they cannot be blocked," adding, "Measures such as requiring disclosure of both the existing RBC ratio and the K-ICS ratio have been put in place, and supervision will be thorough."