The Basic Capital Solvency Ratio (K-ICS), which indicates the 'quality of capital' for insurance companies, is declining in the first quarter of this year. Although insurance companies increased the 'quantity of capital' by issuing a large amount of capital securities this year, just like last year, this signifies a deterioration in the qualitative aspect. Given the difficulty in improving the quality of capital in the short term, it has become essential to focus heavily on risk management. The K-ICS ratio serves as an indicator to assess whether insurance companies can pay claims on time and to understand their management status.
According to the insurance industry as of the 10th, among 39 insurance companies, more than half, or 26 companies, saw their basic capital K-ICS decline compared to the previous quarter in the first quarter of this year. Among large insurance companies, seven insurers saw their basic capital K-ICS fall, excluding Samsung Fire & Marine Insurance.
The reason the basic capital K-ICS has become important is that the financial authorities have upgraded this indicator to a compliance standard in management evaluations. The K-ICS of an insurance company is determined by its available capital (the sum of basic capital and supplementary capital), and the financial authorities are demanding that insurance companies maintain soundness based on basic capital, which has an excellent ability to absorb losses in crisis situations. Supplementary capital is closer to temporary capital that must be repaid when it matures.
As the financial authorities' soundness regulations shift from quantity (supplementary capital) to quality (basic capital), it has become easier to distinguish which insurance companies are sound. Among large insurers, Samsung Fire & Marine Insurance had the highest ratio at 158.6%, with Kyobo Life Insurance at 144.5% and Samsung Life Insurance at 141.4%, both exceeding 100% and showing decent conditions.
On the other hand, DB Insurance's basic capital K-ICS fell to 74.4% in the first quarter of this year, down 11.3 percentage points from the previous quarter, marking the largest drop. Hyundai Marine & Fire Insurance recorded a 10.8% decline to 46.7%, failing to exceed 50%. Compared to Samsung Fire & Marine Insurance, this is 111.9 percentage points lower. Hanwha Life was at 64.7%, which is 79.8 percentage points lower than Kyobo Life Insurance.
Among small and mid-sized companies, Fubon Hyundai Life Insurance, iM Life, Lotte Insurance, Hana Insurance, and MG Insurance recorded below 50% in the first quarter. Of these, MG Insurance, designated as a failing financial institution and on the verge of bankruptcy, had the lowest at -18.2%, while Lotte Insurance, which is undergoing a sale, was at -15.6%.
Until now, most insurance companies have focused on increasing the quantity of capital by issuing subordinated bonds. Issuing subordinated bonds raises the K-ICS; however, it is only recognized as supplementary capital, which does not increase basic capital. The interest on subordinated bonds comes out of retained earnings, one of the components of basic capital, thereby worsening the quality of capital. This is the reason many insurance companies have been criticized for neglecting capital management.
Last year, the issuance amount of capital securities in the insurance industry was 8.7 trillion won, more than doubling from the previous year (3.2 trillion won). Insurance companies are extinguishing urgent issues by issuing capital securities worth 5.22 trillion won this year.
With expectations that interest rates will continue to decline, the deterioration of the basic capital K-ICS is projected to persist for the time being. To increase basic capital, companies must perform well and generate profits, but intense competition makes it difficult to boost operating profits in the short term. A capital increase through paid-in capital dilutes share value and goes against shareholder interests, and increasing basic capital through new capital securities issuance requires meeting stringent standards.
What insurance companies can immediately do is reduce risks to lower required capital. Required capital refers to the funds an insurance company must hold to bear risks. If available capital remains unchanged, a reduction in required capital improves soundness indicators. The financial authorities also noted that 'capital management for insurance companies is essential for asset-liability management (ALM)' and are demanding effective risk management.