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A new report from Fitch Ratings said that South Korean insurers were likely to maintain relatively sound earnings performances in the near term because of their continued focus on protection-type long-term insurance business. This generally produced better contractual service margins (CSM), they said.
Fitch said, due to those conditions, it believed that “effective investment risk management is crucial for Korean insurers” going forward.
However, the report said it expected Korean insurers to adopt a more proactive approach to managing asset allocation partly because of these factors, although their current investment mixes are unlikely to change markedly. “We expect insurers to finetune their portfolios to address duration gaps and the risk charges under Korean Insurance Capital Standards (K-ICS),” it said.
"We expect accounting changes to increase volatility
in investment returns."
The K-ICIS rules came into effect in January last year. The system is similar to those that were launched at similar times in other east Asian countries, such as Taiwan and Japan. New solvency regimes have also been proposed across the wider Asian region.
Fitch said it expected the change to recognise financial instruments using fair value through profit and loss (FVPL) under IFRS9 to increase volatility in investment returns, although stable underwriting performance may offset this. “We believe insurers will try to reduce volatility in their profitability by switching the recognition of assets from FVPL to fair value through other comprehensive income (FVOCI)”. There would also be a likely increase in the release of CSM, driven by sound underwriting performance, which will continue to support Korean insurers’ profitability, it added.
"We expect recent accounting changes to increase volatility in investment returns, but a steady increase in the release of contractual service margin will continue to support Korean insurers’ profitability,” said Sue Kim, Senior Analyst at Fitch Ratings and co-author of the report on the near future conditions for Korean insurers.
As well as these changes, it was recently reported that the financial authorities in South Korea were working on policy frameworks for future finance, which would be based on systematic analyses that are “intended to minimise risks and seek opportunities for growth over the medium to long term”, according to the Financial Services Commission (FSC) Vice Chairman Kim Soyoung.
Korean insurers have allocated more funds to higher-yielding alternative investments in the past few years to diversify and enhance absolute returns. However, due to the more stringent risk charges under K-ICS, compared to the previous RBC regime, Fitch said it expected insurers to gradually reduce these exposures to achieve a balance between the asset risk charges and additional returns.
The wider economic outlook for Korea was also fairly bullish. Kelly Chung, Chief Investment Officer of Multi-Assets at Value Partners Group, said in the ‘Multi-Asset Perspective – July 2024’ report that “the tech-heavy markets of Taiwan and Korea continued to ride on the robust demand for artificial intelligence-related technologies and applications” compared to other parts of Asia were the market was more “mixed”. The overall stable macro backdrop was giving support to credit quality for Asian bond issuers, she added in the report.
"The impact from potential losses in these investments will be manageable relative to the insurers’ overall capital buffers."
This was on “the broad assumption that a US policy pivot does not coincide with a hard landing would cap the downside risk on growth for most Asian countries”, it said.
“We expect the risks to insurer’s capital profiles stemming from real-estate investments and domestic project financing loans to be manageable,” said the Value Partners report. Many Korean insurers increased exposure to domestic project financing loans and overseas commercial real estate when interest rates were low, but conditions for these investments have turned unfavourable, it added.
“Nevertheless, we believe that the impact from potential losses in these investments will be manageable relative to the insurers’ overall capital buffers,” it said.
“Geopolitical tensions and higher inflation have led to
economic concern in recent years."
Other macroeconomic factors were less bullish for Korea and created a more complicated picture. Fitch said it expected the Bank of Korea to begin cutting rates in H2 2024 to 3% by the year's end. Falling interest rates could narrow investment returns and add pressure on insurers' negative spread burden, resulting in unfavourable interest margins for insurers.
This comes at a time when a recent report from the Swiss Re Institute said data showed that more “robust” economies were set to drive insurance growth and profitability.
“Geopolitical tensions and higher inflation have led to economic concern in recent years,” said Swiss Re Institute's annual World Insurance Sigma report, which found that the global economy has remained remarkably resilient, setting the scene for growth and improved profitability across the insurance industry.
It ranked South Korea as the seventh largest insurance market by total premium pool with an estimated $194 billion.
