A New Approach Combining the Advantages of Existing Methods
Easing Liquidity and Reinsurance Cost Burdens
The Financial Supervisory Service (FSS) has revised and announced its guidelines to promote the adoption of "discretionary asset-retained co-reinsurance" by insurance companies. If this product becomes widely traded, it is expected to have a positive impact on managing the capital adequacy ratio (K-ICS) of insurers, which is a key indicator of their financial soundness.
On the 28th, the FSS announced that it had revised the detailed enforcement regulations and operational guidelines for the supervision of insurance companies related to co-reinsurance products.
Co-reinsurance is a product designed so that insurance companies transfer long-term liabilities to reinsurers, who then manage them with long-term assets. This allows not only simple risks such as accidents but also interest rate and policy surrender risks to be transferred to the reinsurer.
When insurance companies participate in co-reinsurance, it helps them manage indicators such as the K-ICS ratio and asset-liability management (ALM) more effectively.
At the end of the first quarter, the average K-ICS ratio of domestic insurers was 197.9%, falling below 200% for the first time. Although it rose by 8.9 percentage points to 206.8% at the end of the second quarter, it is still difficult to say that stability has been achieved. As a result, insurers have been defending their financial soundness indicators by issuing subordinated bonds and hybrid capital securities.
According to the FSS, the only types of co-reinsurance products previously available were asset-transfer and contractual asset-retained types. The introduction of the discretionary asset-retained type is the first of its kind.
The asset-transfer type involves transferring both assets and liabilities to the reinsurer. If the reinsurer goes bankrupt, the ceding company may be exposed to credit or liquidity risks. The contractual asset-retained type involves transferring only the liabilities to the reinsurer, making it difficult for the reinsurer to be involved in managing the retained assets, which inevitably increases reinsurance costs.
The newly introduced discretionary asset-retained type allows the ceding company to retain the assets related to the reinsurance, but the authority to manage the assets and the resulting profits and losses are attributed to the reinsurer. This reduces the risks for the primary insurer compared to the asset-transfer type and offers lower reinsurance costs than the contractual asset-retained type.
The FSS has revised the enforcement regulations to ensure that when the ceding company adopts this product and transfers the asset management authority and profits and losses to the reinsurer, the K-ICS ratio and the disclosed standard interest rate listed in the management evaluation are not reflected, by updating the relevant standards in the regulations.
Additionally, to promote transactions, the FSS has updated the guidelines with accounting treatment instructions and a Q&A section. Detailed examples of accounting for each transaction stage-including contract signing, reinsurance premium payment, and settlement-have been provided.
The FSS will implement the revised enforcement regulations starting today. The updated guidelines have been posted on the FSS website.
An FSS official stated, "We expect the co-reinsurance market to become more active following the introduction of the discretionary asset-retained type," adding, "The FSS will continue to actively support insurers in strengthening their capital management capabilities through the use of co-reinsurance."
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