South Korean financial authorities have picked local non-life insurance company Lotte Insurance Co. as the target for a management improvement recommendation.

According to financial industry sources on Monday, the Financial Supervisory Service (FSS) recently rated Lotte Insurance’s overall management status as Grade 3 (average) and its capital adequacy as a provisional Grade 4 (weak).

Under the country’s supervisory regulations on insurance business, an insurer is subject to a management improvement recommendation if it receives a Grade 3 for overall management and a Grade 4 for capital adequacy. The recommendation is the first and least severe step in the three-stage Prompt Corrective Action (PCA) system that comprises a recommendation, demand, and order for management improvement.

Although a recommendation does not restrict normal operations, simply being subject to the measure can negatively affect the company’s image.

The FSS is expected to forward its assessment results to the Financial Services Commission (FSC), which will make a final decision on whether to implement PCA against Lotte Insurance during a regular meeting. If PCA is enforced, the company will be required to submit a management improvement plan to the authorities.

Lotte Insurance has been under scrutiny since 2024 for its low capital adequacy ratio under the Korean Insurance Capital Standard (K-ICS).

While the financial authorities advised domestic insurers to use a “standard” model when estimating the lapse rate of no-surrender or low-surrender products, Lotte Insurance was the only company that used an “exception” mode, which tends to inflate net profit figures. Some industry observers believe that the company would have posted a loss at the end of 2024 if it had applied the standard model.

Lotte Insurance also recently attempted to exercise a call option on 90 billion won ($65.74 million) worth of subordinated bonds, but regulators blocked the move. The financial authorities assessed that if the bonds were redeemed, Lotte’s K-ICS ratio would fall significantly below 150 percent.

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