The financial authorities have begun work to improve the reserve for surrender benefits system, which has acted as an obstacle to insurers' shareholder returns. But the improvement plan is expected to come out after dividends for the end of last year are decided, so some insurers are again expected to be unable to pay dividends.
According to the financial sector on the 20th, the Financial Services Commission has begun work to improve the reserve for surrender benefits system. It is said to be reviewing measures such as lowering the accumulation ratio from the current level. The reserve for surrender benefits is an amount set aside in advance to prepare for the refund to be paid to customers when an insurance contract is canceled.
The financial authorities improved the system from the end of 2024 to allow only insurers with a risk-based capital (K-ICS) ratio of at least 200% to set aside 80% for the reserve for surrender benefits. Starting last year, it was expanded to insurers with a K-ICS of at least 170%.
The life insurance industry said dividends have become difficult because of the reserve for surrender benefits and conveyed to the financial authorities its opinion that the accumulation ratio should be cut to 50%.
If the surrender benefit exceeds the expected payment amount on the books (insurance liability), insurers must set aside the shortfall as a reserve for surrender benefits. Because the reserve for surrender benefits is deducted from retained earnings, the more that is accumulated, the smaller the profit available for dividends becomes.
The improvement is expected to take place after dividends for the end of last year are decided. Insurers' dividends are decided after year-end settlement of account is completed, going through a board report and a shareholders meeting in sequence. As insurers' year-end settlement of account is entering the final stage, the improvement and whether to pay dividends have become unrelated. The insurance industry also is not expecting improvements.
The insurance industry expects Hyundai Marine & Fire Insurance and Hanwha Life Insurance will be unable to pay dividends. The last dividends by Hyundai Marine & Fire Insurance and Hanwha Life Insurance were in 2023. Insurers with sufficient capital, such as Samsung Life Insurance, Samsung Fire & Marine, and DB Insurance, are expected to pay dividends.
Some insurers say the regulatory level remains high despite two rounds of improvements. They say that as new contracts increase, the structure requires more reserves for surrender benefits, so dividend capacity does not increase. As of the end of September last year, reserves for surrender benefits at 23 life insurers and 18 non-life insurers stood at 46.7602 trillion won. That was up 24.2% from the end of the previous year (37.6398 trillion won). As of the end of last year, it is expected to exceed 50 trillion won.
Some insurers oppose easing regulations on the reserve for surrender benefits. They say even if the accumulation ratio is lowered to 50%, profit available for dividends would not increase much and only taxes would increase. Under the Corporate Tax Act, the reserve for surrender benefits is included as a deductible expense, so the more that is set aside, the smaller the tax base becomes and the less tax must be paid.