Korean insurers scramble to meet new capital ratio in debt void


South Korean insurers are under pressure as they cannot raise funds as they hoped to meet stricter capital regulations under International Financial Reporting Standards (IFRS 17) and the Korea Capital Standard. (K-ICS) in January due to debt limbo.

According to several industry sources on Wednesday, insurers had been active in bolstering capital until the start of this year to meet new accounting system requirements which will come into effect in January next year. They used various financing methods by offering new equities, hybrid securities and subordinated bonds to reinforce the capital.

Their campaign was forced to stall or halt in the face of headwinds in the country’s money market. The debt market quickly deteriorated due to rising yields due to uninterrupted rate hikes after a public developer from Legoland Korea declared default due to local government denial of guarantees where the amusement park is based.

Heungkuk Life Insurance and other insurers withdrew their debt supply plans due to weak demand from institutions.

The key to the new accounting rules is to change the standard for valuing insurers’ debt to market value from book value. Insurance companies need to prepare the premium to be paid in the future in the reserves. According to IFRS17, insurance companies must calculate reserves by applying the interest rates at the time they write their books.

Korean insurers say their financial strength remains solid as they have improved their capital adequacy ratio to comply with the new rules in recent years.

Life insurance companies reported a lower risk-based capital ratio in their third-quarter results. Nonghyup Life Insurance’s RBC ratio stood at 107.3% in the third quarter, down 115.4 percentage points from the same period a year ago. DGB Life Insurance’s ratio also fell by 91 percentage points to 113.1% and that of Hanwha Life Insurance by 36.1 percentage points to 157%, slightly above the financial authorities’ guideline.

The financial authority is closely monitoring the development of the situation. She studied preparation files for IFRS17 and K-ICS and advised insurers deemed to be the least prepared.

By Shin Chan-ok and Lee Eun-joo

By 송선화

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]

Sallie R. Loera