Insurance Company KIX to Revise 150% Standard for the First Time in 24 Years

K-ICS Standard for Early Redemption of Subordinated Bonds to Be Lowered by 10-20 Percentage Points
Improvement of Surrender Value Reserve That Reduced Insurers' Dividend Capacity
Strengthening K-ICS "Basic Capital" to Enhance the Quality of Capital

The financial authorities will significantly improve the Solvency Ratio (K-ICS, K-ICS) introduced under the International Financial Reporting Standards (IFRS17) system. To enhance the quality of insurance companies' capital, the proportion of basic capital will be increased, and the K-ICS recommended standards will be lowered. The burden of reserving surrender value reserves, which reduces insurers' dividend capacity, will also be reduced.

The Financial Services Commission announced on the 12th that it has prepared the "Plan to Advance Capital Regulation in the Insurance Sector," which includes these details, through the 7th Insurance Reform Meeting.

With the introduction of IFRS17 and K-ICS to the insurance sector in 2023, the required capital for maintaining soundness ratios has significantly increased. However, the K-ICS supervisory standard (typically 150%) that must be met when proceeding with approvals such as early redemption of subordinated bonds or adding insurance lines has not changed. As a result, insurance companies have been issuing capital securities worth thousands of billions of won to meet the previously set supervisory standards, increasing interest expenses and financial burdens.

Accordingly, the financial authorities plan to lower the K-ICS standard by 10 to 20 percentage points for the early redemption requirements of subordinated bonds by insurers. This is the first change in the K-ICS supervisory standard in 24 years. The authorities plan to finalize the plan in the first half of this year after going through a practical task force (TF) and quantitative impact assessment. To increase the acceptability of the system, transitional provisions will be prepared to support a smooth landing.

The authorities also decided to adjust other regulatory standards linked to K-ICS, such as adding insurance lines and surrender value reserves, while revising K-ICS. Surrender value reserves are funds that insurers set aside in advance to refund customers when they cancel insurance contracts. It is understood that the improvement plan was prepared in response to criticism that insurers excessively accumulated funds here, reducing tax revenue and dividend capacity. Under the existing system, insurers only need to reserve 80% if K-ICS is above 190% this year, but the authorities plan to reduce the K-ICS burden to 170% through the improvement plan.

K-ICS is calculated by dividing available capital by required capital. Available capital is classified into basic capital (common stock, retained earnings, other comprehensive income, etc.) and supplementary capital (hybrid capital securities, subordinated bonds, etc.) based on loss absorption capacity. The financial authorities have also prepared improvement measures to strengthen basic capital and rationalize supervisory standards to enhance the quality of insurers' capital.

Basic capital, which has a high loss absorption capacity, has so far been used only as a sub-item in management evaluation rather than as a mandatory compliance standard for K-ICS. This caused insurers to neglect managing the quality of their capital. The authorities decided to introduce basic capital K-ICS as a mandatory compliance standard, referring to the banking sector and major overseas countries such as Europe and Canada. In the future, if basic capital K-ICS does not meet the standard, prompt corrective actions may be taken. The authorities plan to strengthen disclosure related to this and actively encourage management by adding basic capital as a monitoring target during insurance sector stress tests.

Advancement of actuarial supervision will also be promoted. IFRS17 is basically a principle-based standard and does not specify detailed actuarial methodologies. Last year, accounting issues arose on specific matters such as the loss ratio of indemnity insurance and the lapse rate of no/low surrender value products, revealing a lack of systematic governance for management and supervision.

The authorities plan to legislate insurance liability evaluation standards for soundness management to enable systematic and detailed management. They will establish legal delegation provisions for the entity preparing practical standards to grant enforceability and enhance the effectiveness of private practical standards. Through this, actuarial supervision, inspection, and internal control will be strengthened. Considering the specificity of the IFRS17 standard, the inquiry and interpretation procedures will also be supplemented to consider actuarial perspectives and impacts when interpretation issues arise.

The emergency risk reserve system will also be improved. Emergency risk reserves are funds set aside to prepare for unexpected large losses. With the growth of the general non-life insurance market, the reserve size has continuously increased, surpassing 12.2 trillion won as of the third quarter of last year. The authorities viewed that the reserve burden has become excessive compared to the original purpose, acting as a factor restricting dividends and tax payments.

The authorities estimated that if the emergency risk reserve system is rationalized, insurers' reserves will decrease by about 1.6 trillion won. Regarding the reversal requirements, unrealistic conditions such as current net loss and insurance business loss will be removed, allowing reserves to be reversed when certain loss ratios are exceeded by line. This is expected to increase the usability of insurers' capital.

The authorities plan to finalize the advanced capital regulation plan for the insurance sector prepared this time through practical TF, stress tests, and industry consultations in the first half of this year. They aim to apply the improvement plan at the year-end settlement and will promote amendments to the Enforcement Decree of the Insurance Business Act and supervisory regulations within the year.

A Financial Services Commission official said, "This measure will induce qualitative improvement of capital in the insurance sector while alleviating excessive regulatory capital burdens such as subordinated bond issuance costs relative to insurers' soundness. Through the adjustment of statutory reserves such as surrender value reserves and emergency risk reserves, the usability of capital will be increased within the scope of sound management of basic capital, and the capacity for tax payments and shareholder dividends will also expand."