Supervisory Standard for Insurers' Capital Adequacy Ratio to Be Lowered from 150% to 130%

'Insurance Supervision Regulation Amendment' Approved at Financial Services Commission Meeting on June 11
First K-ICS Standard Lowering in 24 Years

The supervisory standard for the capital adequacy ratio (K-ICS), a key indicator of insurers' financial soundness, will be lowered from the current 150% to 130%.

On June 11, the Financial Services Commission announced that it had approved and would immediately implement a revision to the insurance supervision regulations reflecting this change during its regular meeting.

The amendment lowers the supervisory standard for K-ICS, which is currently set at 150% for early redemption of subordinated bonds and licensing requirements, to 130%. This is the first downward adjustment in 24 years since 2001.

K-ICS is calculated by dividing available capital by required capital, indicating an insurer's ability to pay out insurance claims promised to customers. It serves as a standard for allowing early redemption of subordinated bonds, granting insurance business licenses, approving capital reductions, and authorizing subsidiary ownership. If K-ICS falls below 100%, the insurer becomes subject to prompt corrective action.

The new recommended standard was set by comprehensively considering the results of the insurance sector’s complex crisis scenario stress test, the reduction in interest rate volatility compared to the previous risk-based capital (RBC) regime, and cases from the banking sector.

The amendment also eliminates the requirements for current net loss and insurance operating loss from the conditions for reversing the emergency risk reserve. The emergency risk reserve is a fund set aside by general insurers to cover unexpected losses. Under the current supervision regulations, reversal of this reserve required meeting all three conditions simultaneously: exceeding a certain loss ratio by line of business, recording a current net loss, and incurring an insurance operating loss. This was criticized as being excessively strict, leading to the recent improvement.

The Financial Services Commission plans to launch an 'Insurance Sector Soundness Task Force (TF)' this month, involving the Financial Supervisory Service, the insurance industry, research institutions, and experts, to further enhance the soundness management system for insurers in the second half of this year.

The TF will review detailed measures to advance the soundness management system for the insurance industry and determine the appropriate pace of implementation. Based on the TF discussions, the Financial Services Commission plans to establish and finalize strict soundness principles and implementation plans within the second half of the year.