HONG KONG–(BUSINESS WIRE)–#insurance–The implementation of more stringent risk measurement under the Korean-Insurance Capital Standards (K-ICS) a year ago has led to a decline in the average solvency ratio for South Korea’s insurance industry, according to a new AM Best special report.
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,” notes 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, including:
To access the full copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=340620.
AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
Copyright © 2024 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.
Contacts
Seokjae Lee
Financial Analyst
+852 2827 3407
seokjae.lee@ambest.com
Christopher Sharkey
Associate Director, Public Relations
+1 908 882 2310
christopher.sharkey@ambest.com
ChanYoung Lee
Director, Analytics
+852 2827 3404
chanyoung.lee@ambest.com
Cynthia Ang
Senior Industry Research Analyst
+65 6303 5026
cynthia.ang@ambest.com
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