Fitch Ratings: New Capital Rules to Enhance South Korean Insurers’ Stability

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Introduction of Revised Capital Requirements

Fitch Ratings reports that the newly revised capital mandates for South Korean insurers are likely to alleviate funding pressures and foster a transition towards more stable capital sources. These regulations, initiated by the Financial Supervisory Service (FSS), aim to lower the capital adequacy threshold while implementing measures that prioritize capital quality. This shift reflects the regulator’s intent to balance oversight of solvency with financial maneuverability.

Details of the Regulatory Changes

Announced on March 12, the revisions include a reduction in the capital adequacy benchmark under the Korean Insurance Capital Standard (K-ICS). The threshold, currently at 150%, is projected to decrease to a range between 130% and 140% by the first half of 2025. This ratio, essential for evaluating an insurer’s available capital against regulatory requirements, significantly influences decisions regarding mergers and acquisitions, licensing, and the redemption of hybrid capital instruments.

Impact on Capital Structure and Market Response

Fitch analysts suggest that these regulatory adjustments are a reaction to the rising use of subordinated capital instruments by insurers, a practice that has raised concerns about financial stability amid market volatility. The introduction of a minimum core capital limit, which includes paid-in capital and retained earnings, aims to ensure insurers maintain a robust capital base to withstand potential financial stress or market fluctuations.

The FSS will also institute a core capital ratio requirement to guarantee that a significant portion of insurers’ reserves consists of high-quality assets. While not expected to dramatically increase funding costs, this change may influence insurers’ future capital structuring.

Though the immediate market impact of the revised framework is expected to be minimal, Fitch anticipates a long-term shift in capital management strategies towards more sustainable earnings models.

Insurance Market Growth and Trends

These developments come amid evolving demographic and economic conditions reshaping South Korea’s insurance sector. According to GlobalData, the insurance market is projected to grow from KRW 218.3 trillion (US$167.1 billion) in 2025 to KRW 249.7 trillion (US$191.2 billion) by 2029. The primary growth catalysts include a rising demand for retirement and health coverage, driven by the rapidly aging population.

In 2024, life and pension insurance are expected to account for 84% of direct written premiums. Following a contraction in 2023, a modest recovery is anticipated as consumers gravitate towards financial stability through long-term policies.

• General insurance is on a growth trajectory, with premiums anticipated to increase by 4.9% in 2024.
• Conversely, motor insurance might experience stagnant growth due to subdued auto sales, influenced by rising interest rates and cautious consumer sentiment.

Moreover, exposure to natural hazards continues to shape policy demand. Government data reported over 30,000 fire incidents by October 2024, with damages amounting to KRW 589.9 billion (US$456 million), likely bolstering interest in property and catastrophe-related insurance.