With the financial authorities deciding to evaluate the soundness of insurance companies based on their basic capital, it is expected that defending the soundness of these companies will become more challenging. Until now, insurance companies have managed their soundness by increasing supplementary capital through the issuance of innovative equity securities and subordinated bonds, but now they must explore options for increasing their basic capital, which presents a greater burden.
To increase basic capital, net income must rise. However, amid intensified competition, it is not easy to boost net income in the short term. Although methods such as reducing dividends or issuing new shares are mentioned, this creates a contradiction that goes against the policy of enhancing corporate value.
According to the insurance industry on the 25th, the financial authorities announced the introduction of a mandatory compliance standard for the basic capital solvency (KICS) ratio during a reform meeting last month. This means that if a company does not meet the KICS ratio standard presented by the financial authorities in the management evaluation, it may receive timely corrective measures.
Following the introduction of the new accounting system (IFRS 17), the soundness of insurance companies will be assessed based on the KICS ratio. The KICS ratio is calculated by dividing available capital by required capital. A higher ratio indicates better soundness, and the financial authorities recommend maintaining it above 150%.
To increase the KICS ratio, either the denominator (required capital) must be reduced, or the numerator (available capital) must be increased. Insurance companies have raised supplementary capital among available capital through the issuance of innovative equity securities and subordinated bonds. Last year, the issuance amount of capital securities in the insurance sector was 8.7 trillion won, a 272% increase from the previous year (3.2 trillion won).
To alleviate the burden of capital expansion, the financial authorities are considering lowering the KICS supervisory standard from the current 150% by 10 to 20 percentage points. If the KICS ratio is adjusted downward, there is an expectation that the burden regarding the reserve ratio for surrender benefits will also decrease.
At the same time, the financial authorities decided to introduce the KICS ratio centered on basic capital. Basic capital is the core capital used to cover funds during a crisis situation, such as when the company records massive operating losses. In contrast, supplementary capital, like subordinated bonds, tends to be more similar to temporary capital with maturity and repayment.
The insurance industry sees the basic capital KICS ratio as a means to distinguish which insurance companies have excellent soundness. However, it is assessed that the intensity of regulation has increased due to the high difficulty of expanding basic capital. An industry insider noted, "This regulation will reveal where the companies with solid basic capital are and which companies have survived on available capital."
To increase basic capital, businesses must operate well so that net income increases while retained earnings grow. Retained earnings refer to the amount leftover after deducting dividends from net income. However, it is not easy to increase net income in the short term. This could be a direct blow to small and mid-sized insurance companies, which have relatively weaker operating and capital capabilities.
Ultimately, there are concerns that the introduction of the basic capital KICS ratio will lead to a reduction in the dividend capacity of insurance companies. Dividends come from retained earnings. For insurance companies that need to accumulate more retained earnings to meet the basic capital KICS ratio, the decision to reduce dividends could be made. Issuing new shares also dilutes existing shareholders' equity, making it not an easy choice.
The financial authorities have not disclosed the supervisory standards for the basic capital KICS ratio. The insurance industry anticipates that it will be around 70%, but several small and mid-sized insurance companies currently do not meet this standard.
As of the end of last year, life insurance companies with a basic capital KICS ratio below 70% include KDB Life (24.8%), Fubon Hyundai Life (43.1%), iM Life (12.5%), and Chubb Life Insurance (53.7%). In particular, Hanwha Life, considered one of the "Big 3" in life insurance, barely exceeded the estimated standard at 73.8%. Among non-life insurers, Hyundai Marine & Fire Insurance (57.5%), Heungkuk Fire&Marine Insurance (53.1%), Lotte Insurance (-1.6%), MG Non-Life Insurance (-7.4%), and Hana Insurance (42.7%) are included.