South Korea’s new capital requirements will relieve burden on insurers – Fitch

Written by Michael Griffiths

31/03/2025

South Korea’s new capital requirements, including a lower capital adequacy benchmark, are to relieve insurers’ capital burden while raising their flexibility and quality, according to Fitch Ratings.

The reduced burden would also alleviate financial pressure on insurers, making it easier for them to comply with regulatory requirements.

Fitch believes these new capital requirements, which were announced by the Financial Supervisory Service earlier this month, 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, Fitch added, depending on the insurers’ capital structure and risk appetite.

The Korean regulator plans to lower the capital adequacy benchmark by the end of H1 this year under the Korean Insurance Capital Standard, and the benchmark ratio is likely to be reduced to between 130% and 140%, from a current level of 150%.

Fitch said this adjustment will affect the benchmark for certain operational events, such as the optional redemption condition of capital securities, M&A and licensing.

“It is unlikely that the regulator will mandate a significantly high core capital ratio, as this could raise capital costs for insurers,” Fitch stated. “Cost of equity capital is generally more expensive than other forms of capital such as subordinated debt.

“Insurers are likely to evaluate capital structures that are commensurate with their risk appetites, earnings profiles and capital costs, subject to the stringency of the core capital ratio.

“We believe the immediate effects of the new capital adequacy measure may be limited. However, over a longer term, we believe insurers will continue to finetune their operating strategies to allow them to produce sustainable earnings to factor in the excess in the cost of their capital.”

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