As the financial authorities decided to introduce the basic capital risk-based capital ratio (K-ICS; Korean Insurance Capital Standard) system for the insurance industry starting next year, analysis shows that Lotte Non-Life Insurance and iM Life, whose basic capital is negative, would need a total paid-in capital increase of about 1.4 trillion won to exceed the 50% basic capital K-ICS threshold.
According to the insurance industry on the 29th, as of the end of September last year, the insurer with the lowest basic capital K-ICS was Lotte Non-Life Insurance (-16.7%). The basic capital K-ICS is calculated by dividing basic capital by the risk-based capital requirement (required capital). Lotte Non-Life's basic capital is -295.3 billion won, and its risk-based capital requirement (required capital) is 1.7617 trillion won. If the required capital remains the same, basic capital would need to increase by 1.176 trillion won to exceed the threshold. On the same basis, iM Life (-5.1%) is estimated to need an additional 215 billion won in basic capital.
Basic capital is the amount obtained by subtracting disallowed amounts and capital that cannot absorb losses from net worth (retained earnings, accumulated other comprehensive income, adjustment reserves, etc.). Disallowed amounts consist of six items, including scheduled shareholder dividends, capital securities that do not meet requirements, and 50% of assets equivalent to defined benefit pension plan assets. Capital that cannot absorb losses consists of seven items, including the excess over recognition limits for basic capital securities and the amount exceeding the surrender value reserve within any shortfall in surrender values.
Lotte Non-Life has net worth of about 1.7 trillion won, but because it has a large amount of capital that cannot absorb losses, its basic capital is negative. To increase basic capital, net income must rise, or the company must issue hybrid capital securities or conduct a paid-in capital increase. It is difficult for an insurer to boost net income in a short period, and issuing hybrid capital securities comes with strict conditions. For this reason, the insurance industry says introducing basic capital K-ICS is effectively a demand for paid-in capital increases.
If the basic capital K-ICS is below 50%, the lowest level of prompt corrective action, a management improvement recommendation, is issued. Below 0% triggers the next level, a management improvement requirement. When prompt corrective action is imposed, an insurer must submit a management improvement plan, but the financial authorities plan to defer prompt corrective action until the end of 2035 to ensure a soft landing for the system.
However, insurers that fail to meet the threshold by the end of March next year will be subject to minimum implementation standards. Once imposed, insurers must improve their basic capital K-ICS every quarter for the next nine years (36 quarters). If they fail to meet the standards one year after the minimum implementation standards are imposed, they become subject to prompt corrective action.
As of September last year, insurers with a basic capital K-ICS of 0% to less than 50% included Hana Non-Life Insurance (9.4%), KDB Life Insurance (16.3%), and Heungkuk Fire&Marine Insurance (42.1%). Hana Non-Life and KDB Life carried out paid-in capital increases in October and December last year to meet the 50% threshold. Heungkuk Fire&Marine Insurance is expected to meet the threshold as the surrender value reserve becomes recognized as basic capital.