In the second quarter of this year, the solvency ratios (K-ICS) of the five major non-life insurance companies (Samsung Fire & Marine Insurance, Hyundai Marine & Fire Insurance, Meritz Fire & Marine Insurance, DB Insurance, and KB Insurance) have risen uniformly. As the possibility of a decline in the K-ICS ratio increased due to the base rate cut, they raised capital through subordinated bond issuance. Although they successfully recovered the K-ICS ratio, which significantly dropped in the first quarter, there are projections that profitability may decrease due to increased interest.
According to the semiannual reports of each company announced on the 19th, Samsung Fire & Marine Insurance had a K-ICS ratio of 274.5% in the second quarter, an increase of 7.9 percentage points from the first quarter. During the same period, Hyundai Marine & Fire Insurance had a K-ICS ratio of 170%, rising by 10.6 percentage points, the largest increase among the five companies. Meritz Fire & Marine Insurance maintained the same level as the first quarter at 238.9%. DB Insurance's K-ICS ratio increased by 8.6 percentage points to 213.3%, while KB Insurance rose by 4.8 percentage points to 187%.
The K-ICS ratio is an indicator created to assess whether an insurance company can properly pay insurance claims in the event of an accident. A decline in this ratio is perceived as a deterioration of the financial soundness of the insurance company, which can lead to decreased trust among policyholders.
It appears that non-life insurance companies have focused on managing K-ICS ratios in accordance with the recent trend of interest rate cuts. Last month, the base rate was 2.5%, down 0.5 percentage points compared to 3% in January. According to the Korea Insurance Research Institute, if interest rates decline by 1 percentage point, the K-ICS ratio is analyzed to fall by approximately 25 to 30 percentage points. In a low-interest-rate environment, liabilities that need to be paid in the future are relatively valued higher, leading to an increase in the insurance company's liabilities, thus causing a decrease in the K-ICS ratio.
The five major non-life insurance companies focused on issuing subordinated bonds to defend against a decline in K-ICS ratios in the first half of this year. Subordinated bonds are bonds with a lower priority in repayment compared to ordinary bonds, yet offer high interest rates. They can be recognized as capital when calculating the capital adequacy ratio (BIS). This means that issuing subordinated bonds can improve the K-ICS ratio.
According to the Korea Securities Depository (KSD) and others, the issuance amount of subordinated bonds by domestic insurance companies in the first half of this year was 5.225 trillion won. This surpassed half of last year's issuance amount of 8.655 trillion won, which was the highest level ever. The overall K-ICS ratio of life and non-life insurance companies in the first quarter of this year was 197.9%, falling below 200% for the first time since the introduction of the system in 2023. This was due to an increase in the required capital standards that must be expanded as sales of long-term protection insurance increased.
The interest burden on non-life insurance companies due to the issuance of subordinated bonds is expected to grow. According to the Financial Supervisory Service (FSS), the total interest on bonds issued by insurance companies in the first quarter of this year was identified as 157.8 billion won. This represents a 61.6% increase from 97.7 billion won during the same period last year, reaching the highest level in terms of quarterly statistics since the FSS began providing related statistics in 2009. The net profit of the five major non-life insurance companies in the first half of this year was 3.1508 trillion won, down about 35% from the 4.8211 trillion won during the same period last year.
An industry official from the non-life insurance sector noted, "Although the cost of defending the K-ICS ratio has increased due to falling interest rates, we are managing it while accepting losses."