The Financial Supervisory Service (FSS) of South Korea is considering the introduction of new regulations to gradually raise insurers’ risk-based capital (RBC) ratios before the introduction of IFRS 17 in 2021.
Current RBC regulations, introduced in 2011, require insurers to have surplus capital as well as legal reserves on hand at all times to shield consumers unexpected losses. A greater difference between insurance benefits to be paid subtracted from the extra capital means a higher RBC ratio. An insurer with a high RBC ratio is regarded as financially stable.
The new regulations being considered by the FSS will extend the maximum duration of insurance liabilities that is used for interest rate risk calculation from 20 years to 25 years by the end of 2017. It will also extend it further to 30 years be the end of 2018, reports BusinessKorea.
The change will mean insurers concentrating on short-term asset management will have a wider gap between the durations of assets and liabilities, leading to exposure to higher interest rate risks and a decrease in RBC ratios without an increase in capital.
Additionally, insurers offering variable insurance products with guaranteed minimum benefits, which are highly sensitive to economic conditions, will be required to have more capital. The capital requirement for these insurers will be raised by 35% this year, 70% in 2018, and 100% in 2019.
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