Korean insurers brace for volatile investment returns

Korean insurers brace for volatile investment returns | Insurance Business Asia

Insurance News

Korean insurers brace for volatile investment returns

Risks to capital profiles revealed

Insurance News

By
Roxanne Libatique

Korean insurers are anticipated to maintain stable earnings in the near future, driven by their focus on protection-type long-term insurance products, which generally yield a favourable contractual service margin (CSM), as per credit rating agency Fitch Ratings’ latest report.

The ongoing release of CSM is set to improve revenue recognition in insurers’ income statements. However, investment returns under IFRS 17 and IFRS 9 are expected to experience increased volatility, highlighting the importance of effective investment risk management for Korean insurers.

Insurers are expected to adjust their portfolios to address duration mismatches and meet the risk charges under the Korea Insurance Capital Standard (K-ICS).

In an effort to diversify and enhance returns, Korean insurers have increased their allocations to higher-yielding alternative investments in recent years. However, the more stringent risk charges under K-ICS, compared to the previous RBC framework, are likely to prompt insurers to gradually reduce these exposures to balance between asset risk charges and returns.

Risks to Korean insurers’ capital profiles

Fitch said it expects the risks to insurers’ capital profiles from real estate investments and domestic project financing loans to be manageable.

Many Korean insurers had increased their exposure to these investments when interest rates were low, but the investment conditions have since become less favourable. Despite this, the credit rating agency believes that potential losses from these investments will remain manageable relative to the insurers’ overall capital buffers.

According to the agency, rising interest rates and shifts in work and consumption behaviours post-COVID-19 pandemic might result in impairment losses among Korean insurance companies with CRE holdings. However, the impact on these insurers’ profitability is expected to be minimal.

It also predicts minimal impacts on Korean insurers’ solvency ratios and overall capitalisation, given the small proportion of CRE exposures in their total asset portfolios.

The agency explained that a majority of Korean insurance companies’ exposure to overseas CRE are through indirect investments in beneficiary certificates. Direct CRE exposure is limited for Korean insurers, except for real estate assets held for their own operational use.