The Financial Supervisory Service (FSS) is planning to adopt new regulations to allow South Korean insurance companies to raise their risk-based capital (RBC) ratios in stages before the introduction of IFRS 17 scheduled for 2021.
This is to encourage them to increase their capital or improve their debt structures in advance with the introduction of the new international accounting standards predicted to increase their debts by at least KRW20 trillion (US$18 billion), reported Business Korea.
According to the current RBC requirements, which went into effect in 2011, each insurance company has to have some surplus capital as well as legal reserves on hand at all times so that its customers can be protected from its unexpected losses. The greater the difference that is obtained by subtracting insurance benefits to be paid from the extra capital, the higher its RBC ratio becomes.
The requirements currently applied to South Korean insurers are rather lax in comparison to international regulations for the same purpose and industry experts have pointed out that local insurers have been quite passive about financial stability improvement for this reason. Under the circumstances, the FSS is going to adopt a new way of RBC ratio calculation so that the ratio falls in local insurance companies that do not increase their capital or do not improve their debt and asset structures.
Specifically, the maximum duration of insurance liabilities that is used for interest rate risk calculation is extended from 20 years to 25 years at the end of this year and then to 30 years at the end of next year. This means insurers concentrating on short-term asset management will be subject to a wider gap between the durations of assets and liabilities, and then they will be regarded as being exposed to higher interest rate risks and their RBC ratios will fall without an increase in capital.
According to the FSS, the extension goes into effect this month in insurance companies that accept it and overall implementation is scheduled for December this year so underprepared insurers can be less affected. In addition, insurers handling more variable insurance products with guaranteed minimum benefits, which are highly sensitive to economic conditions, than the others have to prepare more capital. The required capital to be applied to those products is scheduled to be increased by 35% late this year, 70% in 2018 and 100% in the following year.