Financial authorities to tighten solvency standards for insurers

Financial authorities to tighten solvency standards for insurers

최초입력 2025.05.22 10:18:31

(Yonhap)

South Korean financial authorities are set to significantly tighten solvency standards for insurers whose Basic Capital-based Solvency Ratio, or Korea Insurance Capital Standard (K-ICS), falls below 50 percent.
According to financial industry sources on Wednesday, the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) are preparing to introduce a new regulation that would trigger prompt corrective action for such insurers in the second half of this year.
Under the revised framework, insurance companies will be required to maintain a certain level of capital to ensure timely claim payments, with at least 50 percent of the capital consisting of pure equity capital such as paid-in capital and retained earnings.
This move aims to rein in the practice of relying on externally raised funds to meet solvency requirements.
The financial authorities are considering a grace period of two to three years to cushion the market impact.
Given that the authorities are also reviewing a plan to lower the minimum solvency ratio from 150 percent to 130 percent starting in the latter half of the year, the new basic capital ratio requirement will be layered on top of it.
Once both regulations are in place, insurers must meet at least 50 percent of their solvency capital requirements with basic capital, while the remaining 80 percent can be covered by subordinated bonds or hybrid securities.
This stricter rule is expected to affect a number of domestic insurers.
Disclosures show that several companies - such as Fubon Hyundai Life Insurance Co., Hana Insurance Co, KDB Life Insurance Co., and iM Life Insurance Co. - have basic capital ratios below the 50 percent threshold as of the fourth quarter of last year.
Some firms, including Lotte Insurance Co. and MG Non-Life Insurance Co., fall short of even 0 percent, sources said.
While solvency regulations are designed to ensure insurers remain financially sound and fulfill obligations to policyholders, many firms have been focusing on meeting numerical thresholds using subordinated debt rather than strengthening core capital.
“Maintaining at least 50 percent in basic capital is considered standard in other sectors of the financial industry,” said a financial authority official. “It is not an overly stringent requirement.”
Sources noted that the only ways for insurers to raise basic capital are to raise capital and improve net income.
The authorities’ emphasis on tighter accounting and solvency standards stems from concerns that Korean insurers still fall short of global benchmarks.
MG Non-Life Insurance, for instance, failed to find a buyer due to its recurring solvency issues and was recently placed under the management of Korea Deposit Insurance Corp. (KDIC).
Lotte Insurance also postponed early redemption of subordinated bonds after failing to meet solvency requirements.
These cases echo past instances in North America and Japan where mass insurer bankruptcies caused widespread policyholder anxiety.
The financial regulators’ goal is to actively prevent financial instability through stricter oversight.
The regulators also plan to crack down on the practice of insurers inflating net profits by overly optimistic assumptions about expected loss ratios.
Lower projected loss ratios can boost current earnings in financial statements, which makes it tempting for chief executive officers (CEOs) to present an overly positive financial picture.
However, a significant gap between expected and actual loss ratios can result in large future losses - known as loss ratio deviation - effectively pushing present-day risks into the future.
Given that each insurer currently estimates loss ratios differently, experts argue that clearer guidelines are needed to improve the situation.
The financial authorities are now investigating insurers whose loss ratio deviations over the past three years have consistently shown gains or losses in one direction only, which could indicate unjustified estimates.
While some deviation is acceptable, persistent trends in either direction could raise red flags.
The authorities plan to require insurers with unusually optimistic or conservative estimates to present concrete justifications.
If they fail to do so, the authorities plan to subject them to warnings or sanctions, with the broader aim of indirectly guiding the market toward more realistic and accountable loss ratio forecasting.
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Financial authorities to tighten solvency standards for insurers

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