New Standard Puts Pressure On South Korea Insurers' Capital Management - AM Best

KUALA LUMPUR, Feb 20 (Bernama) -- 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 last year 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.

“This is unlike the previous RBC regime, under which assets were measured at market value while liabilities were booked on a cost basis.

“Other key changes under K-ICS include the introduction of new risk categories, such as longevity, lapse, expense, catastrophe and asset concentration risks,” said AM Best financial analyst, Seokjae Lee in a statement.

The credit rating agency’s “Implementation of K-ICS Continues to Pressure South Korean Insurers’ Capital Management” special report 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).

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, in which 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.

-- BERNAMA