As insurers have increased issuance of capital securities such as subordinated bonds and hybrid capital securities over the past two years to maintain soundness, their interest burden has also grown. Interest alone on bonds issued over the past five years has topped 1 trillion won a year.
According to the Korea Securities Depository on the 7th, subordinated bonds and hybrid capital securities issued by domestic insurers during last year totaled 6.867 trillion won. That was smaller than the previous record in 2024 (8.655 trillion won), but including bonds issued overseas (about 2.09 trillion won), it surpasses 2024. The amount of bonds insurers issued domestically was 2.8685 trillion won in 2021, 4.055 trillion won in 2022, and 3.154 trillion won in 2023.
Insurers expanded bond issuance to shore up capital. Funds raised by issuing subordinated bonds and hybrid capital securities are recognized as capital in accounting. When insurer capital increases, the solvency indicator, the capital adequacy ratio (K-ICS; Korean Insurance Capital Standard), rises. That is why, as of the end of September last year, the overall insurer K-ICS came in at 206.8%, above the financial authorities' recommended level of 130%. Since the introduction of the new accounting standard in 2023 (IFRS 17), insurers have focused intently on managing K-ICS.
The amount of bonds issued by insurers in the past five years that have not yet reached their early redemption (call option) date is 25.5995 trillion won. The resulting annual interest burden is estimated at 1.2359 trillion won. During the high-rate period of 2022 to 2024, the coupon interest rates on bonds issued by insurers were around 5% to 6%. While subordinated bonds and the like are issued with 10-year maturities, it is customary in the market to redeem them early five years after issuance.
The introduction of a regime that imposes prompt corrective action when K-ICS based only on core capital (core capital K-ICS) falls below the threshold is also adding to insurers' burdens. Most funds raised through subordinated bond issuance have been classified as supplementary capital and are not counted toward core capital K-ICS. To increase core capital, insurers must expand net income, conduct paid-in capital increases, or issue hybrid capital securities under stricter terms.
The financial authorities are reviewing the introduction of core capital K-ICS while not imposing prompt corrective action for the next 10 years (a phase-in measure). An official at the financial authorities said, "When we first introduced K-ICS, we applied a 10-year (phase-in), and overseas it can be 15 years."