South Korean insurers face capital challenges under stringent K-ICS standard
The adoption of the Korean-Insurance Capital Standards (K-ICS) a year ago, which introduced more stringent risk measurement criteria, has resulted in a reduction in the average solvency ratio across South Korea's insurance sector, according to a new report by AM Best.
AM Best believes the enactment of K-ICS in South Korea, which began in January 2023 alongside the adoption of IFRS 17 accounting standards, will likely remain a major factor affecting the capital and business strategies of the country’s insurers.
The new standards replace South Korea’s previous risk-based capital (RBC) regime with a more accurate and comprehensive risk management approach in order to better align it with global best practices and standards.
The Best’s Special Report, titled “Implementation of K-ICS Continues to Pressure South Korean Insurers’ Capital Management,” noted that the magnitude of the decline in the industry’s average solvency ratio was smaller than initially expected.
The report describes K-ICS as an “economic value-based model under which insurers’ assets and liabilities are assessed based on mark-to-market approaches (similar to the principle of IFRS 17).”
“This is unlike the previous RBC regime, under which assets were measured at market value while liabilities were booked on a cost basis,” said Seokjae Lee, financial analyst, AM Best. “Other key changes under K-ICS include the introduction of new risk categories, such as longevity, lapse, expense, catastrophe and asset concentration risks.”
According to the report, the economic value approach and more stringent risk measurement of K-ICS are expected to exert downward pressure on insurers’ solvency ratio, in contrast with the previous regime. The pressure could be worse for insurers with relatively weak asset liability management. However, the currently elevated level of market interest rates, coupled with insurers’ continued efforts to improve asset liability management in recent years, could partly mitigate the solvency pressure under the new regime.
“The transitional measures introduced by the country’s Financial Supervisory Service for a soft landing of K-ICS have helped some insurers avoid a substantial drop in their solvency ratio at the time of transition,” Lee said.
According to the report, the adoption of K-ICS has affected the operational strategies of Korean insurers in a variety of ways, in their efforts to secure sufficient available capital while keeping risk at an acceptable level.
Life and non-life insurance companies have been focusing on expanding their sales of protection type products with high contractual service margin (CSM) profitability.
Additionally, as the CSM, which is a liability on the balance sheet, is being amortised and realised as profits over time, it will ultimately contribute to organic growth of capital under IFRS 17.
As assets and liabilities are measured at market value under K-ICS, a narrower duration gap would reduce the sensitivity of insurers’ solvency positions to interest rate movements.
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