Proposed new capital ratio requirements in South Korea will enhance the quality of insurers’ capital and sector resilience, according to Fitch Ratings.
However, the credit rating agency warned that insurers could face challenges in optimising capital structures, depending on the costs of capital strengthening.
Earlier this month, the regulator introduced a minimum core capital ratio of 50%, which will be implemented from January 2027. This was designed to address ongoing vulnerabilities in the Korea International Capital Standard (K-ICS) solvency regime.
Fitch’s rated Korean insurers have maintained financial leverage ratios that are lower than those implied by their Insurer Financial Strength ratings under the K-ICS framework. As such, Fitch said it is expecting any potential reduction in financial leverage stemming from the new requirements to have a “limited impact” on ratings in the near term.
The new requirements focus on getting insurers to include higher-quality capital, such as paid-in capital, retained earnings, Tier 1 capital instruments and surrender value reserves, which provide greater loss absorption in adverse scenarios.
Equity capital or Tier 1 capital instruments are generally more costly than Tier 2 subordinated debt, and Fitch suggested that insurers are “likely to reduce their required capital”, particularly through lowering insurance and market risks, based on their risk appetites, earnings stability and capital costs.
“Fitch believes that the regulator has given insurers sufficient time for capital optimisation, and the new rule implicitly requires insurers to maintain discipline in capital management,” the credit rater said.
“The requirement will likely prompt insurers to reconsider business mixes and investment strategies, with a focus on preserving core capital. We think that sustained capital enhancement through strengthening retained earnings, optimising liabilities and maintaining prudent dividend policies will be essential for insurers to meet the new requirements.”
