Korea Insurance Research Institute: Authorities Should Grant Preparation Period for K-ICS

Insurance Reform Meeting Report on 'Solvency System'
"Systematic Management of Insurance Liabilities Essential for Insurers"

The Korea Insurance Research Institute suggested on May 8 that financial authorities should grant a preparation period to insurance companies with insufficient capital capacity so that they can respond to the Basic Capital Solvency Ratio (K-ICS) system.

The institute made this recommendation in its report titled "Insurance Reform Meeting Contents and Tasks: Solvency System," released on the same day.

Noh Geonyeop, a research fellow and head of the Financial Systems Research Division at the Korea Insurance Research Institute, and Lee Seungjoo, a researcher, explained that during the seven sessions of the Insurance Reform Meeting conducted by the Financial Services Commission over ten months since May of last year, discussions were held on the advancement of the solvency system, systematization of insurance liability management, strengthening of financial information accountability, rationalization of supervisory accounting, and activation of insurance liability management.

The institute analyzed that, following the Insurance Reform Meeting, the management activities of insurers that sold a large volume of high-risk-sensitive products and those that did not have become more clearly distinguishable. This is because the financial authorities are in the process of introducing mandatory compliance standards for the K-ICS basic capital, as well as proposing an advanced actuarial supervision roadmap and a model for applying lapse rates for no- and low-surrender value products.

The institute also called for insurance companies to strengthen their actuarial expertise by hiring more actuarial professionals. This recommendation comes as there have been concerns that recent conservative changes by the authorities to the lapse rate assumptions for no- and low-surrender value products have sharply reduced profits for small and mid-sized insurers.

The institute urged the authorities to support insurers in reducing management risks by preparing a soft-landing plan for the K-ICS basic capital system and establishing private sector practical standards for actuarial assumptions. It emphasized the need to grant a preparation period for insurers with insufficient capital capacity.

Additionally, the institute recommended that authorities consider introducing run-off specialist insurers?companies that stop underwriting new contracts and focus exclusively on managing existing insurance contracts?to help improve insurance companies' profitability and risk management.

Furthermore, to strengthen internal controls related to actuarial assumptions at insurance companies, the institute recommended that authorities support industry experts in developing their own practical standards.

The Korea Insurance Research Institute stated, "The K-ICS basic capital system can enhance the quality of insurers' capital, but it is necessary to allow time for preparation for insurers that are not sufficiently prepared or lack capacity," adding, "In anticipation of demand for contract transfers for capital management, the introduction of run-off specialist insurers can be considered."