'Financial Authorities Lower Emergency Risk Reserve Ratios to Boost Dividend Capacity at Non-Life Insurers'

(Seoul=Yonhap Infomax) Soo Yong Lee – South Korea's financial regulators have decided to lower the emergency risk reserve ratios for non-life insurance companies, aiming to enhance their dividend capacity and ease the burden of reserve accumulation.

According to the Financial Supervisory Service (FSS) on the 25th, the agency will reduce the reserve accumulation standards for automobile, guarantee, and specialty insurance lines by the end of the year.

The standard ratios will be cut as follows: automobile insurance from 2% to 1%, guarantee insurance from 15% to 10%, and specialty insurance from 5% to 3%.

The threshold ratios will also be lowered by 5 percentage points for automobile insurance, 30 percentage points for guarantee insurance, and 10 percentage points for specialty insurance. For overseas inward and outward reinsurance, the threshold will be reduced from 50% to 45%, a decrease of 5 percentage points.

The emergency risk reserve is a statutory reserve that insurers must set aside to prepare for unforeseen accidents and disasters. The reserve applies to six categories: fire insurance, marine insurance, automobile insurance, specialty insurance, guarantee insurance, and overseas inward and outward reinsurance.

Non-life insurers are required to accumulate between 35% and 100% of the calculated amount—derived by multiplying the reserve standard ratio by the quarterly premium—until the reserve reaches a certain percentage of the target premium.

With this regulatory revision, non-life insurers will see a reduction in the scale of emergency risk reserves, thereby increasing their capacity to pay dividends to shareholders.

As the emergency risk reserve, along with the surrender value reserve and bad debt reserve, constitutes a statutory reserve for insurers, a reduction in the emergency risk reserve directly increases distributable profits.

Previously, the Financial Services Commission (FSC) also removed requirements related to net loss and insurance operating loss from the conditions for reversing emergency risk reserves.

These measures are intended to enhance the flexibility of the reserve system and improve insurers' dividend capacity. The FSS is following up with additional steps to further reduce the reserve burden on insurers.

Last year, some insurers were unable to pay dividends due to the accumulation of statutory reserves such as the surrender value reserve. In response, financial authorities are working to improve the system and expand insurers' dividend capacity.

The recommended capital adequacy ratio (K-ICS) has also been lowered by 20 percentage points, and the required accumulation ratio for the surrender value reserve has been reduced. Authorities are currently in discussions with insurers to further improve the system.

An FSS official stated, "The reserve standard ratios had not been updated since they were calculated based on historical data. We have now adjusted them using the latest statistics," adding, "These changes are expected to be reflected when calculating dividends at the end of the fiscal year."

sylee3@yna.co.kr

(End)