New capital requirements for insurers in Korea, including a lower capital adequacy benchmark, are expected to relieve the insurers' capital burden while raising their capital flexibility and quality, said Fitch Ratings in its latest report.
The reduced capital burden would also alleviate financial pressure on insurers, making it easier for them to comply with regulatory requirements.
The Korean regulator plans to lower the capital adequacy benchmark by 1H2025 under the Korean Insurance Capital Standard. The benchmark ratio is likely to be reduced to 130%-140% from the current 150%. This adjustment will affect the benchmark for certain operational events such as the optional redemption condition of capital securities, M&A and licensing.
The regulator will simultaneously introduce core capital ratio requirements to enhance capital quality. The introduction of a mandatory core capital ratio requirement will tighten the quality of capital that insurers hold. The regulator’s imposition of a minimum limit of core capital, such as paid-in capital and retained earnings, is intended to ensure that insurers maintain a sound capital base to absorb potential shocks in adverse scenarios of financial stress or market volatility.
Fitch believes that the new capital requirements announced by the Financial Supervisory Service on 12 March 2025 are partly in response to the excessive reliance on capital security issuance to maintain capital adequacy, which could threaten insurers’ financial soundness. The new rules are likely to decrease the need for capital issuance, depending on the insurers’ capital structure and risk appetite.