Best’s Commentary: Relaxed Discount Rate Lowers Capital Pressures, Elevates Asset Liability Management Significance for South Korea’s Non-Life Insurers

DECEMBER 15, 2025 07:44 AM (EST)

Best's Commentary: Relaxed Discount Rate Lowers Capital Pressures, Elevates Asset Liability Management Significance for South Korea's Non-Life Insurers

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FOR IMMEDIATE RELEASE

HONG KONG - DECEMBER 15, 2025 07:44 AM (EST)
The recent easing of discount rate regulations by South Korea's financial authorities will alleviate pressure on the solvency position of the country's non-life insurers, according to a new AM Best commentary.

South Korea's non-life insurers are facing increasing solvency pressures due to declining market interest rates, along with the tightening of the discount rate calculation for insurance liabilities by its domestic regulators. However, a recently announced plan is expected to slow the pace of these cuts taking effect, which should ease the burden that insurers would face in securing their solvency positions, according to the report.

In South Korea's non-life insurance market, the discount rate used in liability valuation plays an essential role in determining balance sheet strength under IFRS 17 and K-ICS (Korean Insurance Capital Standard), as the majority of the insurance book is structured as long-term contracts. The Financial Supervisory Service (FSS) has been actively involved in setting standards for the discount rate curves to enable better comparability within the industry.

The FSS had initially planned for a soft landing under IFRS 17 accounting standards that were implemented in 2023. This would allow a higher discount rate at implementation, then phasing in discount rate decreases gradually until 2027. However, interest rates have since fallen faster than anticipated. The country's 10-year treasury bond yield has decreased from 3.85% in August 2023 to 2.56% at the end of April 2025, with a partial rebound to 3.34% in the beginning of December 2025.

"The effect of extending the final observation period becomes more severe as the market interest rate is lower than the long-term forward rate," said Seokjae Lee, senior financial analyst, AM Best. "The lower discount rate leads to higher valuations of insurance liabilities, which can exert adverse pressure on the insurer's capital adequacy and K-ICS ratios."

In response to industry feedback, the FSS has revisited its plans related to lowering the discount rate and opted to slow the implementation pace to alleviate excessive capital pressures, according to the report.

To access the full copy of this Best's Commentary, titled, "Relaxed Discount Rate Lowers Capital Pressures, Elevates ALM Significance for South Korean Non-Life Insurers," please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=361002.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.