The financial authorities are pushing to delay the implementation schedule for the extension of the final observation period to 30 years. This is due to the rapid decline in the solvency ratio of insurers (K-ICS).
The Financial Services Commission held the first meeting of the 'Insurance Industry Health Task Force (TF)' on the 1st, attended by related agencies, research institutions, insurance companies, the Insurance Association, and market experts, and disclosed this information on the 2nd.
The TF decided to adjust the implementation schedule for the extension of the final observation period to 30 years applicable to insurers. The final observation period refers to the interval in the liability discount rate curve where government bond rates are utilized. A longer period allows for a more accurate assessment of long-term liabilities for insurers.
Recently, as the decline in market interest rates has deteriorated the financial soundness of insurers, the need to moderate the pace of regulatory application has been raised. According to the Korea Insurance Research Institute, a 1 percentage point drop in interest rates leads to a drop of approximately 25-30% in the insurers' K-ICS ratio. Accordingly, the government had planned to extend the final observation period from the existing 20 years to 30 years earlier this year, but it has decided to implement this gradually over two years by introducing 26 and 30 years.
The TF agreed to reconsider the phased implementation schedule in response to industry opinions. The TF plans to confirm next month options for determining whether to expand the final observation period each year, as well as to extend the implementation schedule longer than the current three-year distribution.
The TF is also pursuing a plan to establish rules regulating the duration gap allowed for insurance companies and imposing compliance obligations in the supervisory regulations. Insurers must align the maturity of their products with their investment assets, such as bonds, to return insurance payments (liabilities) to customers. The difference between asset maturity and liability maturity is referred to as the duration gap. The larger this gap, the greater the risk of fluctuations in the solvency ratio due to interest rate changes.
The TF decided to prioritize the application of duration gap regulations for large companies, while small and medium-sized companies will be implemented sequentially.
Ahn Chang-guk, head of the Financial Industry Bureau at the Financial Services Commission, who presided over the meeting, said, 'To enhance the soundness management system of insurers in the medium to long term, it is necessary to comprehensively review the asset and liability evaluation systems, soundness regulation systems, insurance company resolution systems, and regulatory reforms for diversifying the revenue of insurers.'