Korean insurers strained to meet new capital ratio amid debt limbo

South Korean insurers are under squeeze as it cannot raise funding as hoped to meet the tougher capital regulations under International Financial Reporting Standards (IFRS 17) and Korea-Insurance Capital Standard (K-ICS) in January due to debt limbo.

According to multiple industry sources on Wednesday, insurers had been active to beef up capital until early this year to meet the new accounting system requirement that will take effect in January next year. They employed various financing methods through offering of new shares, hybrid securities, and subordinated bonds to bolster capital.

Their campaign was forced to stall or stop in the face of unfavorable wind in the country’s money market. The debt market rapidly soured on top of rising yields from uninterrupted rate increases after a public developer of Legoland Korea declared default on debt due to refusal of guarantee by the local government where the amusement park is based.

Heungkuk Life Insurance and others insurers withdrew debt offering plans due to tepid demand from institutions.

The key to the new accounting rules is to change the evaluation standard for insurer debt to market value from book value. Insurance companies need to prepare premium to be paid in the future in reserves. Under IFRS17, insurance companies need to calculate reserves by applying interest rates of when they write down their books.

Korean insurers argue their financial soundness remains solid as they had enhanced capital adequacy ratio to meet the new rules for the past several years.

Life insurance companies reported decline in risk-based capital ratio in their third-quarter earnings results. Nonghyup Life Insurance’s RBC ratio stood at 107.3 percent in the third quarter, down 115.4 percentage points from the same period a year ago. DGB Life Insurance’s ratio was also down 91 percentage points to 113.1 percent and Hanwha Life Insurance’s 36.1 percentage points to 157 percent, slightly above financial authority guideline.

Financial authority is closely monitoring developments. It has studied the files of readiness for IFRS17 and K-ICS and has been advising insurers deemed less prepared.

By Shin Chan-ok and Lee Eun-joo