Starting Next Year, 'Basic Capital K-ICS' to Be Introduced for Insurers... Prompt Corrective Action if Below 50%

Financial Services Commission Announces Introduction of 'Basic Capital K-ICS' on January 13
Transitional Measures to Be Applied Until End of 2035 for Smooth Implementation
Portion of Surrender Value Reserve to Be Recognized as Basic Capital

Starting next year, a new basic capital K-ICS (Korean Insurance Capital Standard) regime will be implemented to manage the quality of capital for insurance companies. If an insurer's basic capital K-ICS falls below 50%, prompt corrective action will be imposed. However, to ensure a smooth transition, a nine-year grace period will be applied until the end of 2035.

The Financial Services Commission announced on January 13 that it will introduce this basic capital K-ICS regulation.

With the adoption of the International Financial Reporting Standard 17 (IFRS17), which requires insurance liabilities to be measured at market value, and the K-ICS regime based on it in 2023, changes in fundamental assumptions such as interest rates and loss ratios are now reflected in insurers’ solvency and financial structure. The available capital, a key component of K-ICS, consists of basic capital, which has a high loss-absorbing capacity, and supplementary capital, which is more limited in its ability to absorb losses.

However, the current system only sets K-ICS requirements for total available capital, giving insurers little incentive to improve the quality of their capital structure. Until now, insurers have often relied on increasing supplementary capital through the issuance of subordinated bonds and other capital securities to boost their K-ICS ratios. Supplementary capital is limited in its ability to cover losses when they occur and can also create financial burdens due to interest expenses. In response, the Financial Services Commission has announced that, starting next year, the basic capital K-ICS will be introduced as a capital soundness standard.

The regulatory threshold for the basic capital K-ICS has been set at 50%, taking into account that, as of the end of 2024, market risk in the insurance sector accounts for 45.7% of required capital. After the system is implemented, if an insurer's basic capital K-ICS falls below 50%, prompt corrective action will be imposed. Specifically, if the basic capital K-ICS is between 0% and 50%, a management improvement recommendation will be issued; if it falls below 0%, a management improvement requirement will be imposed. However, to allow insurers time to adapt to the new standard, transitional provisions will be applied when imposing prompt corrective action.

The transitional provisions will require insurers to gradually increase their basic capital K-ICS. As of the end of March 2027, if an insurer’s basic capital K-ICS is below 50%, a minimum implementation standard for basic capital will be set for each insurer. This minimum standard will be based on each insurer’s K-ICS as of March 2027, with quarterly targets set so that the basic capital K-ICS increases proportionally to reach 50% by the end of the nine-year grace period in March 2036. If, after the minimum standard is imposed, an insurer still fails to meet it, a one-year grace period will be granted. If the insurer is still below the minimum standard after this one-year period, the transitional measure will end and prompt corrective action will be taken.

If an insurer’s basic capital K-ICS does not exceed 80%, early redemption of basic capital securities will also be restricted. Currently, for insurance companies to redeem subordinated bonds and capital securities early, their K-ICS after redemption must be at least 130%, or at least 100% with other stringent requirements. The same regulatory approach will apply to capital securities recognized as basic capital. Early redemption will only be permitted if, after redemption, the basic capital K-ICS is at least 80%, or if it is at least 50% and the redemption is accompanied by a refinancing with high-quality, homogeneous capital.

The financial authorities will also adjust the structure for calculating basic capital. If the K-ICS insurance liability (market value liability) is less than the surrender value reserve (cost-based liability), resulting in a shortfall, the amount of the shortfall that the insurer sets aside as a surrender value reserve within retained earnings will be recognized as basic capital. This measure is intended to strengthen policyholder protection by limiting the outflow of surrender value reserves from the company through such reserve accumulation.

To ease the burden of accumulating surrender value reserves for insurers at the end of 2024, the authorities have lowered the required accumulation ratio to 80% for insurers with strong K-ICS ratios. However, concerns have been raised that this could actually disadvantage financially sound companies, as the amount recognized as basic capital would also be reduced (from 100% to 80%). To address this, the authorities have decided that if an insurer accumulates only 80% of the surrender value reserve in accordance with the regulation, despite being able to accumulate 100%, the amount corresponding to a 100% accumulation ratio will be recognized as basic capital within the limit of retained earnings under K-ICS.

A Financial Services Commission official stated, "Within this year, insurers with weak basic capital must prepare and submit improvement plans to enhance their basic capital K-ICS," adding, "The financial authorities will closely monitor the implementation of these improvement plans for each vulnerable insurer and actively encourage the successful adoption of the basic capital K-ICS."