Korean Insurers Focus on K-ICS Compliance as Subordinated Bond and Hybrid Capital Issuance Surges Eightfold in Four Years

Insurance Institute Recommends Greater Flexibility in Borrowing
Issuance Permitted Only for Financial Soundness Purposes
"Gradual Expansion of Permitted Borrowing Purposes"

The amount of subordinated bonds and hybrid capital securities issued by insurance companies has surged eightfold over the past four years, reaching an all-time high. The issuance interest rates were nearly twice as high as the average yield. There are growing calls to allow insurance companies to borrow funds for a wider range of purposes, such as overseas business expansion and company acquisitions.

On August 3, the Korea Insurance Research Institute released a report titled "Review of the Need to Increase Flexibility in Insurance Company Borrowing," which included these recommendations.

According to the Korea Insurance Research Institute, last year the issuance amount of subordinated bonds and hybrid capital securities reached approximately 8.325 trillion won, marking a record high. This figure was about 2.8 times higher than the previous year and about eight times higher than in 2020. Last year, the issuance interest rate for capital securities was 5.59%, significantly surpassing the average operating asset yield of 3.16%.

The Korea Insurance Research Institute pointed out that the current law imposes overly strict limitations on the purposes for which bonds can be issued. Insurance companies issue subordinated bonds to borrow funds in order to meet financial soundness requirements and maintain adequate liquidity. They issue these bonds in a limited manner to manage their risk-based capital (K-ICS) ratio at an appropriate level or above. Current law does not allow subordinated bonds to be issued for the purpose of raising funds for overseas business expansion.

The Korea Insurance Research Institute also noted that capital regulations for the insurance sector are much stricter than those for other sectors such as banks. Banks face no particular restrictions on the purposes for which they can issue bonds. Insurance companies are only allowed to borrow funds for the purposes of meeting financial soundness standards and maintaining liquidity.

While banks can use a variety of funding instruments such as deposits, call money, and certificates of deposit (CDs), insurance companies rely mainly on the issuance of capital securities, which involve higher funding costs. It is difficult for them to use a range of options such as bonds, repurchase agreements (RPs), or commercial paper issuance.

Even compared to overseas insurers, the requirements and limits for permitted borrowing are relatively strict in Korea. In New York State in the United States, insurance companies are not required to provide company assets as collateral during the borrowing process. In the United Kingdom, there are no special legal restrictions related to funding. Australia does not impose funding limits based on asset type.

The Korea Insurance Research Institute advised that Korea should also improve its regulations related to insurance company borrowing. Rather than completely abolishing restrictions on borrowing purposes, it recommended that the range of permitted purposes be gradually expanded.

Moon Jaeyoung, a research fellow at the Korea Insurance Research Institute, said, "Allowing subordinated bonds to be issued for a wider range of purposes, such as overseas business expansion and company acquisitions, can encourage more efficient borrowing."