HONG KONG, September 30, 2013—A tightening regulatory risk-based capital (RBC) regime coupled with the recent rises in interest rates has prompted South Korean insurers, particularly small to midsize companies, to seek enhanced capitalization, according to a new report from A.M. Best Co.
South Korea’s Financial Supervisory Service reported that the RBC ratio of the country’s insurance industry (both life and non-life companies) declined by 34.1 percentage points to 273.7% in the quarter ended June 30, 2013, while five-year government bond yields jumped to 3.14% from 2.58% during the same period. The non-life companies’ average regulatory solvency margin dropped 20.6 percentage points to 264.3%, while life companies saw their regulatory RBC ratio decline 39.8 percentage points to 277.7%.
Interest rates started to increase from historic low levels reached in March 2013 to 3.3% in September. Although the higher interest rates help insurers to improve profitability through greater investment income, the positive impact is far offset by the negative impact on insurers’ balance sheets from the significant proportion of bonds in their investment assets.
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