South Korea:Co-insurance spells solvency solution to insurers, opportunities to reinsurers

A regulatory change in South Korea permitting co-insurance to be used as a type of reinsurance arrangement may unlock opportunities and alternative capital sources for insurers, while reinsurers may benefit from greater business opportunities, according to a new AM Best report.

Previously, only risk premiums may be ceded to reinsurers under the Insurance Business Act. The change in regulation now allows for risk transfers associated with other types of risks, such as risks from future interest rate changes and policy cancellations, both of which stem from savings premiums under South Korean regulatory definitions.

The new Best’s Commentary, titled, “South Korea Regulation Change Brings Solvency Solution to Primary Insurers and Opportunities to Reinsurance Market,” states that with the new amendment, a new source of capital may help to provide solvency relief for life and non-life primary insurers with large interest rate risk exposures as they prepare for the upcoming implementations of both IFRS 17 accounting standards, and a more stringent risk-based capital (RBC) regime — the Korea Insurance Capital Standard — and likely will translate into a positive for primary insurers’ credit profiles.

Insurance companies increasingly have adopted hybrid or debt securities issuance as a method to improve their available capital positions under the local RBC calculation framework. However, this practice has not been sufficient to mitigate fully the rising interest rate risks for some companies. It also potentially introduces other challenges, such as higher interest expenses and increased leverage.

AM Best also notes that the industry’s efforts to lower required capital through narrowing their asset-liability mismatch gaps by raising asset duration are met with challenges such as a limited supply of long-duration assets in the domestic market, as well as volatile hedging costs for overseas investments. The regulatory change should increase demand for reinsurance, though the ultimate capital relief benefit provided to the industry will depend on the reinsurance pricing and capacity available in the market.

Given the lack of local experience and precedents, AM Best anticipates that the larger international reinsurance players with experience in offering alternative capital solutions will be pioneers in this aspect; at the same time, these developments likely also will spur South Korea’s national reinsurer to expand its current scope and product offerings.

Source: Asia Insurance Review

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