“Insurance companies need to calculate their solvency ratio through their own internal models”

“Insurance companies need to calculate their solvency ratio through their own internal models”

It was suggested that insurance companies need to calculate their solvency ratios using their own internal models. When calculating the solvency ratio through the standard model presented by the financial supervisory authorities, it is easy to compare between companies, but it is difficult to reflect the unique risk characteristics of each insurance company, so the purpose is to supplement this by operating an internal model system.

In a report titled ‘Introduction of K-ICS (New Solvency System) Internal Model: Necessity and Plan’ on the 12th, Research Fellow Geon-yeop Noh of the Insurance Research Institute said, “All insurance companies calculate the solvency ratio using the standard model presented by the supervisory authorities, but the insurance company’s own “There is a need to calculate it using the internal model, which is the standard,” he argued.

According to the report, in the current K-ICS system, the solvency ratio is calculated by dividing available capital by required capital. At this time, the ‘standard model’ method, which calculates the risk amount for required capital according to the standards presented by the financial supervisory authorities, is applied to all companies.

Researcher Noh said, “Calculating the solvency ratio using the standard model is easy in terms of comparability between companies, but has limitations in reflecting the unique risk characteristics of individual insurance companies and establishing a risk-centered management culture system.” He added, “Insurers can “Risk management not only allows management to understand the characteristics of the company’s business and identify necessary capital and risk management strategies, but also allows the board of directors to effectively manage and supervise management,” he emphasized.

The report pointed out that there is a need to create a foundation for operating an internal model system in K-ICS. The internal model is a model that calculates the risk amount according to the insurance company’s own standards, and can be used to calculate the solvency ratio with approval from the supervisory authority.

Researcher Noh said, “The International Association of Insurance Supervisors (IAIS) and the Bank for International Settlements (BIS) are recommending the use of internal models to improve risk management in financial institutions. Accordingly, global insurance companies and domestic banks in Europe are “The internal model is already being applied,” he explained.

The report concluded that the introduction of an internal model can help insurance companies manage capital effectively and improve management efficiency, and can also contribute to increasing external credibility. Researcher Noh said, “Unlike the standard model, the internal model is expected to better show the risk level of individual insurance companies, but it also appears that incentives for insurance companies to apply the internal model will be needed.” He suggested, “The industry needs to secure the manpower and experience necessary to prepare internal models, and it is necessary to consider comparability between insurance companies and correlation with other systems.”

Reporter Lee Kang-jin [email protected]

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