(Bloomberg) — South Korea’s insurers have been told by regulators to boost capital to prepare for an aging population, with the United Nations predicting a world-beating average life expectancy of 95.5 years by the end of the century.
The Financial Supervisory Service will from next year require insurance companies hold capital at a level that gives a 99 percent probability they’ll be able to absorb losses when credit risks are taken, up from 95 percent now. Korean Reinsurance Co. sold $200 million of 30-year hybrid securities for the first time on Oct. 14 while Heungkuk Fire & Marine Insurance Co. sold 60 billion won ($57 million) of subordinated bonds last month.
Stung by the near-collapse of American International Group Inc. during the 2008 financial crisis, global insurance watchdogs have been forcing operators to strengthen their balance sheets. Korean regulators are also considering using a longevity risk measure when weighing risk-based capital ratios, given the country has a population aging faster than Japan.
“The strengthened rules will lead to a significant drop in insurance companies’ capital ratios,” said Choi Jong Won, a credit analyst at Samsung Securities Co. in Seoul. “They’ll need to sell more securities such as subordinated bonds and hybrid notes.”
The government is seeking to improve insurers’ financial soundness to protect policyholders and to observe the core principles laid down by the International Association of Insurance Supervisors, the FSS said in a July 31 statement.
Strengthening insurers’ capital ratios is a must because Koreans will have an average life expectancy of 95.5 years by 2095, the highest in the world, according to a UN report released last year.
“Insurance companies may need to raise capital by selling hybrid or subordinated securities as well as new shares to meet the strengthened capital rule,” Cho Young Hyun, a research fellow at the KoreaInsurance Research Institute in Seoul, said.
Nine too-big-to-fail insurers, including AIG, Allianz SE and MetLife Inc., must start reporting capital ratios next year using a method presented by the Basel-based IAIS this week as “the first-ever globalinsurance capital standard.”