The Financial Supervisory Service (FSS), South Korea’s financial regulator, has revealed its policy goals for the upcoming months, focused on preparing the market for worldwide regulatory developments, as well as dealing with future risks.
With regard to the insurance industry, the FSC is bracing for a regulatory change set for 2021 that will require insurers to report their debt in terms of market value instead of book value. The change will place a burden on insurance firms to come up with additional capital as the size of their liabilities will increase.
To soften the blow of the incoming regulation, the FSC is taking pre-emptive measures such as the gradual introduction of a risk-based capital requirement system beginning this year. This will see the finance watchdog extend the insurance liability duration from 20 years to 25 years, and then further extend it to 30 years in 2018.
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The move will widen the gap between asset duration and liability duration instead of doing it in one big blow once the new regulation comes in effect in 2021. This gives insurance firms more time to gradually grow their asset duration.
“To our calculation, insurance companies must have about 60% of necessary capital ready by 2021,” Jin Tae-guk, director general of insurance supervision of the FSC, told
JoongAng Daily.
In the first half of 2016, the South Korean insurance industry’s net income was at KRW4.3 trillion (US$3.78 billion), with a return on assets of 0.88%. Both figures were the highest among the various domestic financial industries, highlighting insurance’s importance to the country’s economy.
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