Surrender refund reserves, which have swelled to 58 trillion won (surrender reserves), are not only blocking insurance company dividends but also destabilizing capital ratios. Surrender reserves are expected to surpass retained earnings, requiring the difference to be deducted from the basic capital ratio. Financial authorities are reviewing fundamental improvement measures, such as lowering the conservative assumption for mass surrender at liquidation levels (80–100%) to around 30%.
According to financial authorities and the insurance industry on the 9th, the surrender reserve fund introduced in 2023 to protect policyholders is, contrary to its original purpose, threatening even the basic capital ratios of insurance companies, raising concerns of a 'shock'.
Insurance companies are valuing insurance liabilities payable to policyholders at market prices under IFRS17 (new insurance accounting). However, when market-valued liabilities are smaller than surrender refund reserves calculated on past cost basis, the difference must be accumulated as surrender reserves. Financial authorities have established a 'safety net' to ensure surrender payments can be made at any time in the event of mass contract cancellations by policyholders.
However, due to a combination of high interest rates, excessive competition for new contracts, and conservative assumptions on mass surrender rates, surrender reserves have surged more than twofold from 23.7 trillion won just before the system's introduction to 58.1 trillion won as of the end of June.
Since surrender reserves represent liabilities payable to policyholders, they are excluded from distributable profits. This is why major insurance companies such as Hanwha Life, Hyundai Marine & Fire Insurance, KB Insurance, and Shinhan Life have been unable to pay dividends despite earning tens of billions of won in annual profits.
To make matters worse, surrender reserves now pose a crisis that could drag down basic capital ratios. At the current pace, insurance companies whose surrender reserves exceed retained earnings will emerge starting next year. The portion of surrender reserves exceeding retained earnings must be deducted from the basic capital ratio, which is the 'core' of insurance company soundness. This inevitably leads to a decline in insurance company capital ratios. Financial authorities will implement regulations on the basic capital ratio at 50% gradually starting next year. Insurance companies failing to meet this threshold will face 'corrective measures for timely intervention'.
In fact, as of the end of June, Hanwha Life's surrender reserves stood at 7.1097 trillion won, already reaching 97.2% (just below) of its retained earnings of 7.3131 trillion won. Hanwha Life's basic capital K-ICS (solvency ratio) was 58%, nearing the regulatory threshold of 50%. Among life insurance companies, NH Life, Dongyang Life, Mirae Asset Life, and DB Life face risks to their capital ratios. Among property and casualty insurers, NH Property & Casualty Insurance, Heungkuk Fire & Marine Insurance, Lotte Property & Casualty Insurance, and Hanwha General Insurance are also at risk of having their capital ratios reduced.
Financial authorities are also reviewing fundamental improvement measures. It is reported that a likely option under consideration is to make the mass surrender rate assumption more realistic by reducing it from the current 80–100% (based on the extreme assumption that "the insurance company will go bankrupt") to 25% for protection-type contracts and 35% for savings-type contracts. Another proposal being discussed is to treat surrender reserves as 'zero' for contracts that initially run at a deficit but later turn profitable (where liabilities become negative).
A financial authority official stated, "In line with the introduction of basic capital ratio regulations next year, we are reviewing fundamental improvement measures—not temporary fixes—to ensure the surrender reserve system functions in accordance with its original purpose."
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