The solvency margin ratio, or K-ICS, of insurance companies at the end of last year was 206.7%, representing a decrease of 11.6 percentage points compared to the previous quarter's 218.3%. K-ICS is the value obtained by dividing available capital by required capital, and it increases when available capital rises. To prevent a decline in K-ICS, insurers increased available capital by issuing subordinated bonds. However, due to a drop in interest rates leading to an increase in insurance liabilities, available capital decreased by 10.8 trillion won to 248.1 trillion won by the end of last year.
On the 15th, the Financial Supervisory Service revealed the status of insurance companies' solvency margin ratios. The K-ICS ratio for life insurance companies was 203.4% at the end of last year, down 8.3 percentage points compared to the previous quarter, while property and casualty insurers recorded a decrease of 16 percentage points to 211%.
Without applying transitional measures, the K-ICS for all insurance companies showed a decline of 11.4 percentage points to 191.3%. Life insurance companies experienced a decline of 8.5 percentage points to 182.7%, while property and casualty insurers dropped 15.5 percentage points to 203.2%.
Before applying transitional measures, all three major life insurance companies saw a decrease in K-ICS. Samsung Life Insurance recorded a drop of 8.6 percentage points to 184.9%, Kyobo Life Insurance experienced a decrease of 1.6 percentage points to 164.2%, and Hanwha Life fell by 0.4 percentage points to 163.7%. Life insurance companies exceeding 200% included Shinhan Life, AIA Life, and Lina Life.
All five major property and casualty insurers saw declines in K-ICS. Samsung Fire & Marine Insurance dropped 16.1 percentage points to 264.5%, DB Insurance fell 25.7 percentage points to 203.1%, Hyundai Marine & Fire Insurance decreased by 13.1 percentage points to 157%, and Meritz Fire & Marine Insurance experienced a decline of 8.8 percentage points to 248.2%.
The decline in K-ICS was due to a reduction of 6.2 trillion won in other comprehensive income and a decrease in available capital by 4.8 trillion won due to the settlement of accounts effect. While the value of assets increased due to lower interest rates, the increase in the valuation of insurance liabilities outweighed it, resulting in a decline in other comprehensive income.
In contrast, required capital increased to 120 trillion won at the end of last year, an increase of 1.4 trillion won compared to the previous quarter. The expansion of sales in protective insurance contributed to an increase in disability and disease risk amounts by 2.8 trillion won, and related risk amounts rose by approximately 1.5 trillion won due to the expansion of investment assets. An increase in required capital causes K-ICS to decline.
The FSS diagnosed that there is a need to refine asset-liability management (ALM) for interest rate fluctuation control. The FSS noted that liabilities increase significantly compared to assets when interest rates decline, and pointed out that some insurers' management is lacking as they expand products with long maturities.
It was also pointed out that the profitability indicator, the Contractual Service Margin (CSM), has not adequately reflected risks. Selling protective products with low returns compared to risks solely for securing CSM leads to a significant increase in required capital, which inevitably causes K-ICS to drop.
The FSS particularly emphasized the management of core capital. Core capital encompasses equity capital and retained earnings, which are essential for insurers. In the event of significant losses, it has a superior loss absorption capacity than available capital. The FSS is reviewing the introduction of the basic capital K-ICS as a compliance standard rather than as a secondary item in management assessments. In exchange, the recommended K-ICS threshold will be lowered from the current 150% to 130%.
The FSS said, "When evaluating the management practices of insurers, we plan to examine the risk management framework comprehensively and guide the preparation of response plans for vulnerable areas based on the specific risk characteristics of each company."