Korean insurers’ earnings to be sound; investment returns more volatile

Written by Adam Cadle

23/07/2024

Korean insurers are likely to maintain relatively sound earnings performance in the near term because of their continued focus on protection-type long-term insurance business, which generally produces better contractual service margin (CSM), Fitch Ratings has said.

Ongoing release of CSM will enhance insurance revenue recognition in income statements, it said, however their investment returns recognised under IFRS 17 and IFRS9 would be more volatile. Therefore, Fitch said it believes that effective investment risk management is crucial for Korean insurers.

Fitch expects Korean insurers to adopt a more proactive approach to managing asset allocation, 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 K-ICS. 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, we expect insurers to gradually reduce these exposures to achieve a balance between the asset risk charges and additional returns.

“We expect the risks to insurer’s capital profiles stemming from real-estate investments and domestic project financing loans to be manageable. 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. Nevertheless, we believe that the impact from potential losses in these investments will be manageable relative to the insurers’ overall capital buffers.”

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