Insurance companies achieved their largest-ever results last year, but the solvency ratio, which is a measure of financial soundness, decreased. This is due to the application of guidelines that conservatively assume the surrender rate of non-redeemable and low-redeemable products, changes in accounting systems such as the discount rate for insurance liabilities, and the impact of interest rate cuts.
The solvency ratio is the value obtained by dividing the available capital of an insurance company by the required capital. According to financial authorities' guidelines, the surrender rate for non-redeemable insurance must be set low, and insurance companies must set aside more reserves for claims they need to pay to customers. As a result, the total liabilities increase, reducing the numerator of available capital and causing the solvency ratio to decline.
Similarly, when the base rate is lowered, the total liabilities increase, leading to a decline in the solvency ratio. Insurance products have long maturities, making them more sensitive to interest rates. Given that the Bank of Korea has indicated a potential rate cut, the solvency ratio is likely to fall significantly for life insurance companies with long maturities. Previously, the Korea Insurance Research Institute predicted that if the base rate decreases by 1 percentage point, the solvency ratios of life insurance and non-life insurance companies are expected to drop by 25 to 30 percentage points.
Since last year, insurance companies have been focusing on increasing capital by issuing subordinated debt and hybrid securities to defend their solvency ratios. According to the Korea Securities Depository, the scale of subordinated debt and hybrid securities issued by insurance companies last year was 8.655 trillion won, increasing 1.7 times from the previous year’s 3.154 trillion won. Hanwha General Insurance and TONGYANG Life Insurance each issued 500 billion won and 300 billion won in subordinated debt this year. Tongyang plans to issue 700 billion won in capital securities.
Shinhan Life recorded a net profit of 528.4 billion won last year, achieving its best performance to date. However, its solvency ratio dropped to 206.8%, a decrease of 44 percentage points from the previous year. KB Insurance's solvency ratio decreased by 27.8 percentage points to 188.1% last year, while KB Life Insurance also recorded a decline of 64.5 percentage points to 265.3%. Financial authorities recommend maintaining a solvency ratio of over 150%. Notably, if it falls below 200%, dividends are also not possible.
In particular, the solvency ratios of the 'Big 3' in the life insurance industry—Samsung Life Insurance, Hanwha Life, and Kyobo Life Insurance—are also declining. Samsung Life Insurance's solvency ratio fell below 200% for the first time in the third quarter of last year, while Hanwha Life and Kyobo Life Insurance recorded 164.1% and 170.1%, respectively. There are growing concerns that some insurance companies may not exceed the 150% recommendation from financial authorities even after the transitional measures have passed.
In the insurance industry, there are complaints that issuing subordinated debt and hybrid securities will only increase interest costs. This is because the issue is not about financial soundness but rather an increased burden due to the application of new regulations.
An industry insider noted, "While issuing subordinated debt and hybrid securities will certainly have a clear effect on defending the solvency ratio, ultimately, improving the product portfolio to enhance performance appears to be the fundamental solution at this point. The solvency ratio is ultimately a metric that insurance companies must manage, and it is believed that reliability will be regained once the transitional phase has passed."