"Need to Review Plans to Expand 'K-ICS' Incentives for Insurers' Climate Investments"

Europe and Japan Establish Climate Regulatory Frameworks
"Korea Should Introduce Soundness Regulations and Then Incentives"

In order to promote climate-related mid- to long-term investments by insurance companies, financial authorities need to swiftly introduce soundness regulations related to the capital adequacy (K-ICS) ratio and expand investment incentives, according to a recent recommendation.

The Korea Insurance Research Institute made this suggestion in its report, "Policy Trends for Promoting Sustainable Investment by Insurance Companies," released on the 17th.

Park Hee-woo, Research Fellow, and Kang Yoonji, Researcher, who authored the report, explained that overseas, policy frameworks to encourage insurance company investments are being established in order to achieve climate policy objectives.

Major global institutions are currently implementing indirect measures by providing supervisory framework guidelines.

The International Association of Insurance Supervisors (IAIS) has published supervisory guidance for insurers on climate risk. This includes best practices and recommendations regarding corporate governance, enterprise risk management (ERM), asset and liability valuation, and disclosure, to serve as references for supervisory authorities in each country.

In particular, the guidance states that insurers should consider and assess both physical and transition risks arising from climate change within the Own Risk and Solvency Assessment (ORSA) process, in order to evaluate the impact of climate-related risks of investee institutions on capital.

The European Insurance and Occupational Pensions Authority (EIOPA) has provided guidelines enabling insurers to review their own climate risk assessment and management strategies through ORSA and the K-ICS ratio, among others. It also assists insurers in conducting their own climate scenario analyses.

For example, it presents evidence that transition risks are higher in stocks and bonds of high-carbon industries, thereby offering a basis for standardizing sustainability risk. It also recommends considering the introduction of additional capital requirements for related assets during the calculation of the capital adequacy ratio.

Japan and the European Union (EU), among others, are implementing more direct regulations.

The Japanese government announced its Green Transformation (GX) Promotion Strategy in 2023. To achieve carbon neutrality by 2050, it plans to attract 150 trillion yen (about 1,350 trillion won) in public-private joint investments over the next ten years.

On the fiscal side, the government secured the budget by issuing 20 trillion yen (about 180 trillion won) in GX transition bonds over the next ten years.

On the financial side, it encourages private investment through measures such as debt guarantees and equity investment support. Since new businesses in the GX sector face high initial failure risks and it takes a long time to realize profits, the government is also encouraging the enhancement of capabilities for selecting and managing investment targets.

Similarly, the EU is implementing direct financial support policies such as debt guarantees to provide incentives to private companies. Through 'InvestEU,' a strategic investment fund established with 200 billion euros (about 325 trillion won), the EU offers financial support centered on debt guarantees.

InvestEU aims to attract 372 billion euros (about 605 trillion won) in public and private investment by 2027. To date, it has provided 26.2 billion euros (about 43 trillion won) in debt guarantees. The multiplier effect has reached 14.8, meaning that for every euro spent, 14.8 times more money is circulating, indicating the initiative is progressing smoothly.

Park and Kang explained, "By providing debt guarantees, the government can attract private investment and generate a multiplier effect without directly investing in individual projects," adding, "This approach minimizes government intervention in the market, reduces risks for private investors with limited public funds, and maximizes investment attraction."

The Korea Insurance Research Institute also recommended that Korea should promptly review soundness regulations for insurers and financial support measures. However, it noted that a challenge remains: sufficient data and methodologies must be secured to differentiate capital requirements according to climate risk in the K-ICS ratio calculation process.

Previously, on March 19, 2024, the Financial Services Commission announced the "Plan for Expanding Financial Support to Respond to the Climate Crisis," under which policy financial institutions (including Korea Development Bank, Export-Import Bank of Korea, Industrial Bank of Korea, Korea Credit Guarantee Fund, and Korea Technology Finance Corporation) will provide a total of 420 trillion won in policy finance for climate crisis response by 2030. While this plan presented a vision for responding to the climate crisis, it did not include provisions related to debt guarantees by private financial institutions.

Park and Kang recommended, "It is necessary to review, from a long-term perspective, various financial support measures such as debt guarantees, as well as funding methods for parent funds, including bond issuance."