Insurance companies have continued to show signs of recovery in their financial health indicators over the past year. While it may appear that their capital capacity has improved, a closer look reveals that the rise is largely due to gains in the stock market rather than fundamental growth. As the implementation of the basic capital solvency ratio (K-ICS) system approaches next year, the management of insurers' 'real capital' is expected to come under scrutiny.
According to the Financial Supervisory Service on June 19, the K-ICS ratio for insurance companies rose to 216.1% at the end of March, an increase of 3.8 percentage points from the previous quarter. After dropping to 197.9% at the end of March last year, the ratio has shown a steady upward trend, reaching 206.8% at the end of June, 210.8% at the end of September, and 212.3% at the end of December.
The K-ICS ratio serves as a key indicator of an insurer's ability to pay claims, even in the event of unexpected losses. It compares the capital available to the scale of risks that insurers will need to manage in the future. A higher number indicates a greater capacity to pay out claims.
However, the reasons behind this improvement raise concerns. Following the application of transition measures, available capital increased from 249.3 trillion won at the end of March last year to 310.9 trillion won at the end of March this year, a rise of 61.6 trillion won. Available capital is crucial for assessing an insurer's financial health, as it represents the funds available to absorb losses.
Recently, the impact of rising stock prices has been particularly significant. The increase in other comprehensive income for insurers was 7.1 trillion won at the end of September last year, but it expanded to 15.9 trillion won by the end of December and 18.9 trillion won by the end of March this year. The appreciation of financial assets, including stocks held by insurers, has contributed to the increase in reported capital. Of the 26.9 trillion won increase in available capital in the first quarter of this year, approximately 70% was attributed to gains from rising stock prices.
This suggests that the improvement in solvency ratios is more a result of rising stock values rather than strong operational performance. If the stock market declines, the capital capacity could diminish accordingly.
The illusion of improved solvency ratios becomes more pronounced when excluding transition measures. These measures were introduced with the new accounting system and K-ICS in 2023 to mitigate the immediate burden on insurers by allowing for a gradual reflection of impacts over a certain period. Applying these measures has the effect of increasing the K-ICS ratio.
Before the application of transition measures at the end of March, the K-ICS ratio stood at 202.6%, which is 13.5 percentage points lower than after the measures were applied. Notably, KDB Life Insurance had a ratio of only 74.5% before the transition measures, while Fubon Hyundai Life Insurance was at 50.8%, both falling below the supervisory standard of 100%. After applying the transition measures, their ratios increased to 186.1% and 200.1%, respectively, but without these measures, it indicates insufficient capital capacity.
This is why financial authorities plan to scrutinize the 'quality of capital' for insurers starting next year. A representative from the financial authorities stated, "In the future, we will examine basic capital, such as paid-in capital and retained earnings, more rigorously, as these are essential for absorbing losses directly."
* This article has been translated by AI.
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