Insurance companies in South Korea are required to gradually increase their capital reserves from the end of this year, the financial regulator said yesterday, ahead of the adoption of new global accounting rules in 2021.
To help insurers raise their capital reserves, the Financial Services Commission (FSC) said it will gradually cut discount rates for insurance liabilities by 2019, reported The Korea Herald.
In order to ease the financial burden on insurers, the financial regulator said it will recognise 90% of newly added capital this year as risk-based capital; 80% of new capital as risk-based capital in 2018, 70% in 2019 and 60% in 2020.
When the new global accounting standards, the International Financial Reporting Standards 17 (IFRS17), takes effect in January 2021, some insurers will face capitalisation pressure because the new rules require insurers to report liabilities on a market value, instead of book value.
Last October, the FSC said that the overall amount of additional capital increase for insurers stemming from IFRS17 should be less than the KRW42 trillion (US$37 billion) initially estimated by the Korea Insurance Research Institute.
The Financial Supervisory Service (FSS) is also reportedly going to adopt a new way to calculate risk based capital (RBC) ratio so that the ratio would decline 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 will be 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 would be more affected. In addition, insurers handling more variable insurance products with guaranteed minimum benefits, which are highly sensitive to economic conditions, 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.