The Financial Services Commission said on the 13th it will implement from Jan. 1 a plan to upgrade capital regulations in the insurance sector, centered on adopting insurers' basic capital ratio (K-ICS) as a new capital soundness standard. The basic capital ratio is the value obtained by dividing basic capital by required capital and is an indicator that assesses an insurer's loss-absorbing capacity more directly.
The current K-ICS system only stipulates the K-ICS ratio for total available capital, prompting continued criticism that insurers lack incentives to improve the quality of their capital structure. To raise their K-ICS ratio, insurers have in part relied on increases in supplementary capital through the issuance of capital securities such as subordinated bonds. Supplementary capital has constraints in offsetting losses when insurers incur losses and can act as a financial burden due to interest costs and other factors.
The Financial Services Commission (FSC) set the basic capital ratio standard at 50% through this measure. If the basic capital ratio falls short of the standard, prompt corrective action will be imposed. If the basic capital ratio is 0% or higher but under 50%, a management improvement recommendation will be imposed, and if it is below 0%, a management improvement requirement will be imposed.
For early redemption of capital securities recognized as basic capital, redemption will be allowed only if the basic capital ratio after redemption is at least 80%, or if it remains at least 50% while being refinanced with high-quality or like-for-like capital. The basic capital ratio system will take effect on Jan. 1 after revisions to the Insurance Business Act. However, considering the industrywide adaptation, a total grace period of nine years will be granted for imposing prompt corrective action.
For insurers whose basic capital ratio falls short of 50% as of the end of March next year, a minimum implementation standard will be imposed for each insurer. The minimum implementation standard sets quarterly targets so that, starting from the basic capital ratio as of the end of March next year, it reaches 50% by the end of March 2036. If the minimum implementation standard is not met, a one-year implementation period will be granted, and if it still falls short thereafter, the grace measures will end and prompt corrective action will be imposed.
The Financial Services Commission (FSC) also plans to improve the system so that if an insurer could fully set aside a surrender value reserve but set aside only 80% under the rules, the surrender value reserve based on the 100% standard will be recognized as basic capital within the limit of retained earnings under K-ICS.
The Financial Services Commission (FSC) plans to receive improvement plans within this year from insurers with weak basic capital and, together with the Financial Supervisory Service, closely examine implementation to ensure the system takes root stably.