South Korean insurance companies will face higher capital requirements for mortgage lending as financial authorities raise the risk coefficient for home-backed loans with loan-to-value ratios between 60% and 80% from 3.5% to 4%, effective end of September. The regulatory change aims to redirect capital away from real estate markets toward productive financing sectors while preventing potential systemic risks from property price declines. The adjustment is part of authorities' broader initiative to activate productive finance by previously lowering risk coefficients for policy programs, venture investments, and qualified infrastructure.
Financial Authorities Raise Mortgage Risk Coefficient to 4%
According to the insurance industry on the 8th, financial authorities decided to raise the risk coefficient applied to mortgages handled by insurance companies starting end of September. Mortgages with LTV ratios between 60% and 80%, which previously received a 3.5% risk coefficient when calculating the K-ICS (Korea Insurance Capital Standard) ratio, will face a 4% coefficient from end of September.
Authorities have been pursuing rationalization of mortgage risk coefficients to activate productive financing. The policy prevents capital from flowing into real estate markets while directing it toward productive finance and aims to prevent systemic risks that could arise from real estate price declines.
K-ICS Ratio Decreases 0.1 Percentage Points Under New Requirements
When the mortgage risk coefficient rises, required capital increases proportionally, lowering the K-ICS ratio. As of end of March, the credit risk amount increase from the risk coefficient rise totaled 78.6 billion won, reducing the K-ICS ratio by 0.1 percentage points.
The impact on insurance company capital remains limited as the adjustment involves raising the risk coefficient for a specific LTV range by 0.5 percentage points. However, since calculations are based on outstanding balances, the change could reduce insurers' incentives to originate new mortgages going forward.
Major Insurers Already Reducing Mortgage Origination
Insurance companies have recently been reducing mortgage origination to decrease household debt. Samsung Life and Samsung Fire & Marine closed non-face-to-face channels, while Hanwha Life and Nonghyup Life stopped handling mortgages due to exhausted lending limits.
Under these circumstances, insurers gain capacity to invest surplus capital in productive sectors. Authorities already lowered risk coefficients for productive finance, and if future policies including internal models and matching adjustments are introduced to enhance capital utilization, insurers could further expand investment capacity.
Market interest rate increases recently created K-ICS ratio buffers for many insurers, leaving them with the task of deploying surplus capital to improve returns. Insurers must raise investment returns to pay policyholders' insurance claims amid burdens from rising loss ratios and expanding actual-to-expected differences in insurance operations.
A financial authority official stated, "By rationalizing coefficients, we are guiding funds flowing to real estate toward productive financing. As mortgage lending decreases, funds will flow in other directions even incrementally."
FAQ
What did South Korean financial authorities do to insurance mortgage lending on the 8th?
Financial authorities announced they will raise the risk coefficient for insurance company mortgages with LTV ratios between 60% and 80% from 3.5% to 4%, effective end of September. The change affects K-ICS ratio calculations.
Why are authorities raising the mortgage risk coefficient for insurers?
Authorities aim to redirect capital away from real estate markets toward productive financing sectors while preventing potential systemic risks from property price declines. The policy complements previous measures that lowered risk coefficients for policy programs, venture investments, and qualified infrastructure.
