Introduction of Duration Gap Regulations for Insurers... Ultimate Observation Maturity to Be Gradually Adjusted Until 2035

Duration Gap Indicator to Be Added to Insurance Company Management Evaluations Starting in 2027
Duration and Duration Gap to Be Included in Insurance Company Management Disclosure Items
Ultimate Observation Maturity to Gradually Rise to 30 Years by

Starting in 2027, duration gap regulations will be introduced in the management evaluation of insurance companies. The ultimate observation maturity, which is currently set at 23 years, will be gradually increased over a 10-year period beginning next year, reaching 30 years in 2035.

The Financial Services Commission and the Financial Supervisory Service announced the "Duration Gap Regulatory Plan" and the "Plan to Realign the Discount Rate for Insurance Liabilities" on October 19.

Duration measures the sensitivity of asset and liability values to changes in interest rates. The duration gap is the difference in duration between liabilities and assets, serving as an indicator of how much net asset value changes in response to interest rate fluctuations.

Lee Eokwon, Chairman of the Financial Services Commission (center), held his first inaugural meeting on the morning of the 16th at the General Insurance Association in Jongno-gu, Seoul, together with the Life Insurance Association, the General Insurance Association, and CEOs of 20 insurance companies. Financial Services Commission

Domestic insurance companies have a higher proportion of long-term products compared to major overseas insurers, resulting in longer liability durations. As a result, asset durations are also managed to be longer. Although the average duration gap is similar to that of major overseas insurers, there are significant deviations in some cases, indicating considerable variation.

Until now, the financial authorities have not directly regulated the duration of insurance companies. Instead, duration has been indirectly regulated by reflecting interest rate risk factors in the calculation of the risk-based capital ratio (K-ICS). However, the authorities have determined that the current level of regulation is insufficient for proactive duration management to respond to long-term interest rate trends.

Accordingly, from 2027, the duration gap indicator will be added as an item for assessing interest rate risk in the management evaluation of insurance companies. If the gap exceeds a certain range, the interest rate risk assessment grade will be set at Grade 4 or lower, thereby strengthening the regulation. Duration and duration gap will also be added to management disclosure items to encourage market discipline and enhance monitoring systems.

The authorities have also clarified the definitions of duration and duration gap. Duration is defined as "the ratio of change in the value of interest rate-bearing liabilities or assets under prudential accounting when the market-observed interest rate changes by 1 percentage point." The duration gap is defined as "asset duration minus liability duration multiplied by [interest rate-bearing liabilities divided by interest rate-bearing assets]."

Before the introduction of the regulations, the authorities plan to conduct on-site inspections to ensure proper management of duration gaps by insurance companies. They will review the status and management practices of duration gaps for each insurer as of the end of June and September, and for vulnerable companies with worsening duration gaps, they will hold executive meetings and request improvement plans. If necessary, executive roundtables will be held to encourage strict duration gap management by insurance companies.

The authorities have also decided to delay the application of the 30-year ultimate observation maturity to help reduce interest rate risk for insurers. The ultimate observation maturity refers to the longest market-observed interest rate period used in calculating the discount rate for insurance liabilities, based on market data such as government bond yields. Last year, the authorities extended the ultimate observation maturity from 20 years to 23 years, with plans to gradually increase it to 30 years by 2027. However, due to continued interest rate declines and the inversion of long- and short-term rates, which have placed a burden on insurers' K-ICS, the authorities have decided to ease the regulatory burden.

Going forward, the ultimate observation maturity will be extended over a 10-year period from 2026 to 2035. It will remain at 23 years for 2026 and 2027, increase to 24 years for 2028 and 2029, and then be extended by one year annually so that 30 years is ultimately applied in 2035. An official from the Financial Services Commission stated, "To ensure policy credibility and allow insurers to prepare with predictability, we will adhere to this schedule unless there are extremely exceptional circumstances."

The schedule for expanding the ultimate observation maturity will be applied immediately from 2026 without any separate measures. In the case of duration regulations, a quantitative impact assessment will be conducted within this year, and supervisory regulations will be revised. The introduction of definitions for duration and duration gap, as well as management disclosure, will be implemented from 2026. The reflection in management evaluations will begin in 2027. On-site inspections and close monitoring of duration gap management will be implemented immediately following the announcement of these measures.

An official from the Financial Services Commission said, "These measures are intended to flexibly respond to changes in market conditions, ease excessive prudential burdens, and encourage structural improvements for insurers vulnerable to interest rate fluctuations. Going forward, we will steadily pursue improvements to prudential regulations, such as refining actuarial assumptions and the basic capital ratio, and this will serve as a starting point for comprehensive asset-liability management (ALM) and enhancing investment returns in the insurance industry."