FSC to Ease Capital Regulations for Insurers... Legislative Notice on Lowering K-ICS from 150% to 130%

Requirements for Surrender Value Reserve Ratio to Be Improved
Amendments Targeted for Completion in the Third Quarter

On April 29, the Financial Services Commission announced the legislative notice of amendments to the Enforcement Decree of the Insurance Business Act and supervisory regulations as a follow-up to its plan to enhance capital regulations in the insurance sector.

The Financial Services Commission will rationalize the regulatory standards for the solvency ratio (K-ICS, K-Insurance Capital Standard), including the requirements for early redemption of subordinated bonds. Taking into account the significantly strengthened risk management standards for insurers following the introduction of K-ICS, the commission plans to lower the K-ICS thresholds currently used in various forms under insurance-related laws and regulations.

The current K-ICS threshold of 150% applied to early redemption of subordinated bonds and licensing requirements will be lowered to 130%. This reduction was determined based on a comprehensive consideration of the following factors: the results of the insurance sector's comprehensive crisis stress test; the increase in required capital and the decrease in interest rate volatility compared to previous systems (-20.8 percentage points); and cases from the banking sector.

The amendment will also apply to the requirements for the adjusted reserve ratio for surrender value reserves, which are currently being gradually expanded under transitional provisions. This year, the K-ICS standard allows insurers to accumulate only 80% of surrender value reserves if their K-ICS ratio is 190%, but this threshold will be reduced to 170% in the future. In addition, the amendment will remove unnecessary requirements (such as favorable interest rate conditions) for early redemption of subordinated bonds by insurers, in light of the excessive restrictions compared to other sectors like banks and international standards (ICS).

The amendment will also ease requirements for the reversal of catastrophe reserves. Catastrophe reserves are funds set aside in general insurance, such as fire and marine insurance, to prepare for unexpected losses. The size of these reserves has continued to grow in line with the expansion of the general insurance market, reaching 12.3 trillion won as of last year. There have been many calls for a review of the adequacy of the reserve requirements set in 2005 and for improvements to the excessively strict reversal conditions.

The amendment will address these concerns by removing the requirements for current net loss and insurance operating loss from the reversal conditions for catastrophe reserves. As a result, even if an insurer does not incur an operating loss on its overall financial statements, it will be able to reverse reserves to cover losses if the loss ratio for a particular insurance line exceeds a certain threshold. The size of the reserves will also be adjusted to more realistic levels (to be reflected in the amended enforcement rules). Through these changes, the usability of the reserve system is expected to improve, as well as insurers' capacity to pay dividends to shareholders.

The scope of business for "simple general insurance agencies," which were previously only allowed to sell general insurance products, will be expanded to allow them to sell life insurance products as well. In addition, the types of businesses that insurance company subsidiaries can engage in without prior approval or notification will be expanded to include long-term rental housing businesses under the Special Act on Private Rental Housing. This is intended to support new business ventures by insurers. The grounds for simple complaint handling by associations will also be clarified to lay the foundation for more efficient complaint processing.

The legislative notice and regulatory amendment process for the revised Enforcement Decree and supervisory regulations will continue until June 9. Afterward, the amendments are scheduled to be finalized in the third quarter of this year, following review by the Regulatory Reform Committee, the Ministry of Government Legislation, vice-ministerial meetings, and the Cabinet meeting.

A representative from the Financial Services Commission stated, "For the enforcement rules of insurance supervision, where details are delegated, we plan to continue communication and review meetings on insurance reform so that amendments can be completed within the third quarter," adding, "We will ensure close communication and market monitoring so that the insurance sector can smoothly adapt to the improved system without any setbacks."