Easing rules on how much South Korean insurers must set aside for surrender value reserves could saddle major non-life insurers with nearly 3 trillion won in additional corporate taxes, according to a new analysis. The finding suggests that deregulation intended to expand insurer dividends could instead trigger a large tax bill, blunting the policy's effect. Keeping the current system in place, however, would allow reserves to keep growing and constrain insurers' use of capital, leaving regulators with a difficult choice.
iM Securities estimated in a report that lowering the accumulation ratio for surrender value reserves to 35% from the current level of about 80% would leave five non-life insurers — Samsung Fire & Marine Insurance, DB Insurance, Hyundai Marine & Fire Insurance, Hanwha General Insurance and Meritz Fire & Marine Insurance — with a combined 2.98 trillion won ($2.1 billion) in additional corporate taxes, financial industry sources said on the 16th.
DB Insurance faced the largest burden at 742 billion won, followed by Samsung Fire & Marine Insurance at 734 billion won, Hyundai Marine & Fire Insurance at 613 billion won, Meritz Fire & Marine Insurance at 497 billion won and Hanwha General Insurance at 394 billion won. Measured against expected net profit for this year, the additional tax burden amounted to 107.6% for Hanwha General Insurance, 59.9% for Hyundai Marine & Fire Insurance and 46.2% for DB Insurance.
A surrender value reserve is a statutory reserve that insurers set aside from retained earnings to cover the gap between the surrender value they owe policyholders and insurance liabilities on their books. The amount is excluded from distributable profit but is recognized as a deductible expense under tax law, deferring corporate tax payments. As of the second quarter, the five insurers held a combined 21.19 trillion won in such reserves, and lowering the accumulation ratio to 35% would cut that by about 11.92 trillion won. The result is a trade-off: more room for dividends in exchange for a heavier tax burden.
Leaving the current system unchanged, on the other hand, would keep the reserve burden growing, according to another analysis. The Korea Insurance Research Institute said in a report last month on issues and tasks surrounding surrender value reserves that industry-wide reserves rose to 53 trillion won at the end of last year from 34.3 trillion won at the end of 2023. The institute projected reserves would swell to 87.5 trillion won by the end of 2030, with their share of retained earnings rising to 64.5% from 46.4% at the end of 2025.
The rapid buildup is also restricting insurers' dividends, investment in new businesses and mergers and acquisitions. Only three listed primary insurers — Samsung Life Insurance, Samsung Fire & Marine Insurance and DB Insurance — paid year-end dividends for last year. Noh Gun-yeop, a research fellow at the Korea Insurance Research Institute, recommended adjusting the accumulation standard while adding transitional measures, such as spreading out the recognition of taxable income or allowing installment tax payments, to prevent deferred taxes from concentrating in a short period as existing reserves are released.
Financial regulators are also weighing their options. The Financial Services Commission and the Financial Supervisory Service gathered opinions from individual insurers through the life and non-life insurance associations in August, but the responses diverged widely — ranging from reducing required reserves to allowing voluntary accumulation to keeping the current rules. Insurers with limited capacity to pay dividends are hoping for deregulation, while those that have already secured such capacity are worried about the extra tax burden.
Seol Yong-jin, an analyst at iM Securities, said appropriate controls on operating expenses, including new business acquisition costs, should be put in place before the reserve system is overhauled. He added that it would be reasonable to review broader changes after assessing the impact of the sales commission overhaul taking effect in 2027.