IFRS 17, K-ICS weakens average solvency ratio

The adoption of K-ICS drove operational strategies of Korean insurers to focus on expanding sales of protection-type products with high profitability. 

The implementation of Korean Insurance Capital Standards’ (K-ICS) stricter risk measurement has resulted in a decline in the average solvency ratio of South Korea's insurance industry, according to a report by AM Best 

The K-ICS, introduced alongside the adoption of IFRS 17 accounting standards in January 2023, aims to enhance risk management practices in line with global standards.

Under K-ICS, insurers' assets and liabilities are evaluated using mark-to-market approaches, differing from the previous risk-based capital (RBC) regime.

Key changes include the introduction of new risk categories such as longevity, lapse, expense, catastrophe, and asset concentration risks.

Although the impact on solvency ratios was less severe than anticipated, K-ICS's economic value-based model and stricter risk measurement are expected to exert downward pressure on solvency ratios, particularly for insurers with weaker asset liability management.

However, the current high market interest rates and insurers' efforts to enhance asset liability management could partly mitigate this pressure.

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The transitional measures introduced by the Financial Supervisory Service have aided insurers in navigating the transition to K-ICS without significant drops in solvency ratios.

The adoption of K-ICS has influenced the operational strategies of Korean insurers, leading to a focus on expanding sales of protection-type products with high profitability. 

Additionally, the amortisation of contractual service margin (CSM) under IFRS 17 is expected to contribute to organic capital growth over time. 

Moreover, as assets and liabilities are measured at market value under K-ICS, a narrower duration gap would reduce insurers' solvency sensitivity to interest rate fluctuations.