South Korea Eases Discount Rate Rules to Bolster Non-Life Insurer Solvency

South Korea's non-life insurance sector has been under heightened solvency pressure due to declining market interest rates and stringent domestic regulatory adjustments to discount rate calculations for insurance liabilities. Recognizing these challenges, the Financial Supervisory Service (FSS) has modified its approach to discount rate implementation to ease capital adequacy pressures on insurers. The discount rate is critical in liability valuation under IFRS 17 accounting standards and the Korean Insurance Capital Standard (K-ICS), especially given the predominance of long-term contracts in South Korea's non-life insurance book. Initial regulatory plans allowed a gradual reduction in the discount rate starting from a higher rate at IFRS 17 adoption in 2023, but sharper-than-expected declines in the 10-year treasury bond yield, which dipped from 3.85% in August 2023 to 2.56% by April 2025, prompted a reassessment. Lower discount rates increase insurance liabilities valuations, which in turn place downward pressure on insurers' capital adequacy and solvency ratios. In response, the FSS has slowed the pace of discount rate declines to mitigate excessive capital strain, enhancing the importance of effective asset-liability management (ALM) for non-life insurers in South Korea. This regulatory adjustment reflects a balance between maintaining prudential capital standards and supporting insurer solvency amidst evolving interest rate environments.