The Insurance Capital Standard: Latest developments in South Korea and Japan

Authored by Beom Park, Actuarial Consulting Lead, Keiichiro Yamada, Senior Actuarial Consultant, RNA Analytics.

The public consultation on the Insurance Capital Standard (ICS) as a prescribed capital requirement (PCR) closed in September 2023, marking the beginning of the International Association of Insurance Supervisors’ (IAIS) final assessment of the economic impact of the standard. Scheduled to take effect by the end of next year, the standard is expected to be the most significant regulatory development for global insurers in 2024.

Instigated in 2013 in response to the Great Financial Crisis of 2007–09, the ultimate goal of the ICS is to establish a single standard for internationally active insurance groups which includes a common methodology that better aligns capital standards to achieve comparable outcomes across jurisdictions.

During the ten years of its development, implementation approaches and timetables have come to vary across global markets.

In South Korea, a modified version of the ICS, K-ICS, went live in January 2023, affecting South Korean insurers’ solvency strength to varying degrees depending on their capital structures and risk profiles. At its core, K-ICS strives to ensure that insurance companies maintain robust capital reserves, effectively protecting policyholders and aligning their risk profiles with the country’s dynamic economic landscape.

In contrast to the previous risk-based capital regime in South Korea, K-ICS stands out distinctly. Firstly, it mandates insurers to adopt marked-to-market valuations for both assets and liabilities, marking a fundamental shift that ensures a more authentic assessment of insurers' financial positions. Secondly, K-ICS introduces increased granularity by encompassing risk categories omitted in the previous regime, including longevity, surrender, expense and catastrophe risks. Additionally, it enhances the confidence level used to calibrate the regulatory capital regime, raising it from 99% to 99.5%.

To ensure compliance with K-ICS, the RNA K-ICS™ Solution offers an end-to-end and streamlined answer to K-ICS compliance, specifically designed to accommodate the intricacies of K-ICS reporting, enabling insurance companies to efficiently gather and process the necessary data and information.

K-ICS is expected to reshape insurers’ operational strategies significantly, but, according to the local regulator, the Financial Services Commission (FSC), 12 life insurers, 6 non-life and one reinsurer had applied the transitional measures as of the end of September 2023. The remaining 34 insurers are currently in the process of full adoption.

Our K-ICS Solution has also informed some elements of our bespoke solution for the Japan insurance market, J-ICS. The concept of risk-based capital is not new to Japan, but the new regime introduces new regulatory capital rules based on economic value – the Economic value-based Solvency Ratio (ESR).

This is in contrast to the existing solvency regime which relies on a locked-in approach to assess liability – posing limitations on liability evaluation and producing a solvency ratio that is constrained in its ability to comprehensively assess risk, and hindering carriers’ understanding of their risk positions.

The introduction of the new solvency regime brings with it a more nuanced risk assessment approach involving a thorough clarification of each risk – prompting insurance companies to develop and implement their own tailored risk strategies.

To support them in addressing the specific regulatory challenges involved in this, RNA Analytics’ R³S J-ICS Package is an R³S Standard Code model (model template) for J-ICS that contains comprehensive standard formulas to cost-effectively adopt a J-ICS-compliant approach.

The J-ICS Package has been developed in such a way that it can quickly respond to trends in the development of Japan’s local version of the ICS, which is expected to launch in 2026; and RNA Analytics updates the package regularly to reflect these regulatory changes. With this tool, users can improve operational efficiency and reinforce internal control in compliance with the Financial Services Agency (FSA) template.

Additionally, Japan’s new solvency regime lays out strict governance measures both internally and externally, and by utilising the J-ICS Package in tandem with Workflow Manager’s strong audit capabilities, users can enhance their governance practices to meet the FSA’s expected standards.

It is anticipated that the FSA will introduce the new regime from FY 2025, with first disclosures expected in Mar 2026. As the actual implementation date approaches, Japanese insurance companies are expediting their preparations for J-ICS.

RNA Analytics’ dedicated, multi-lingual teams are on hand to support and guide clients with ICS implementation, and other complex, global regulatory challenges throughout 2024 and beyond.