South Korea Mandates Stricter Core Capital Rules for Insurers by 2027

New Capital Quality Standards to Take Effect

South Korean insurance companies are bracing for a significant overhaul of capital quality requirements, set to commence in January 2027. The new regulations, introduced by the Financial Services Commission (FSC), will mandate a minimum core capital ratio of 50% under the existing Korean Insurance Capital Standard (K-ICS) framework. This move aims to bolster the resilience of the insurance sector by prioritizing higher-quality capital sources.

The regulatory shift is designed to ensure that insurers possess ample resources to absorb potential losses stemming from market volatility or financial stress. It marks a departure from previous practices that, according to a Fitch Ratings analysis, allowed companies to inflate solvency ratios through the use of Tier 2 subordinated debt, thereby increasing refinancing risk during periods of economic strain.

Defining Core Capital and Its Impact

Under the revised framework, 'core capital' will primarily consist of paid-in capital and retained earnings. This stricter definition excludes a broader range of hybrid or debt instruments that were previously counted towards capital adequacy. The emphasis on these higher-quality capital components is expected to enhance the overall financial stability of the industry.

The implementation of these new rules is anticipated to have several key impacts on insurers:

• Increased Funding Costs: Some insurers, particularly those that have historically relied heavily on hybrid capital, may face higher funding costs as they adjust their capital structures.
• Capital Structure Optimization: Companies will need to optimize their capital structures, with a focus on building up core capital.
• Corrective Measures: Insurers whose core capital ratio falls below the 50% threshold will be subject to corrective actions by the regulator.

As of the third quarter of 2025, reports indicated that 16 out of 38 life and non-life insurance companies had core capital ratios below 80%, highlighting the adjustments many firms will need to make.

Transition Period and Broader Regulatory Context

Recognizing the scale of the changes, the FSC has provided a substantial transition period. A nine-year grace period will allow insurers to gradually adapt to the new requirements, extending through March 2036. For insurers with core capital ratios below 50% by the end of March 2027, firm-specific 'implementation benchmarks' will be assigned, gradually increasing towards the 50% target by the end of March 2036. Failure to meet these benchmarks for two consecutive years will result in the termination of transitional arrangements and the application of corrective measures.

These capital quality enhancements are part of a broader regulatory evolution in South Korea's insurance sector. The K-ICS system itself was introduced in January 2023, alongside the International Financial Reporting Standard 17 (IFRS 17), which mandates the measurement of assets and liabilities at market value. Furthermore, the current reforms also include plans to adjust the recommended K-ICS solvency ratio, lowering it from 150% to a range of 130%–140%.