Korea’s life insurers to bear the weight of new rules

Life insurers in Korea are having to weigh how best to prepare for incoming new capital rules and accounting standards that could affect their asset portfolios.
Korea’s life insurers to bear the weight of new rules

This article was adapted from a feature on Korean life insurers that originally appeared in the Spring 2020 edition of AsianInvestor.

Korea's insurance companies are facing the impact of the coronavirus at a time when they are increasingly having to adapt how they invest due to an array of incoming new rules. 

While the implementation date of the IFRS 17 global accounting standards in Korea has been shifted to the start of 2023 it will, along with the K-Insurance Capital Standard (K-ICS), greatly affect the appeal of different assets.

“IFRS 17 and K-ICS continues to steer insurers to move away from savings-type and annuity products – an area where mid-sized insurers were active,” said Young Kim, an analyst at Moody’s Investors Service. 

The insurers’ respective investment approaches will differ, depending on whether they have mostly fixed or floating liabilities, but adapting to the new standards will affect many parts of their businesses.

“This includes cost savings, improving the liability structure by restructuring product line ups
and further diversification of the asset side of the portfolio. In this case, the consideration of what to invest and what not-to-invest will depend on the cost, such as RBC and duration, and benefit, such as expected return, duration, analysis,” said Andrew Shin, head of investment in Korea at Willis Towers Watson.

However, the investment teams of the insurers have two broad priorities ahead of the incoming rules: to gradually increase asset durations to match the increasing average life of their liabilities, and to find ways to increase investment yields. 

The companies are tending to avoid much equity investing due to high capital charges under K-ICS and increasing earnings volatility under IFRS rules, and hedge funds have also been seen as relatively less attractive. Instead, both life and non-life insurers have increasingly invested in alternative and overseas assets.

These areas accounted for an average of 24% of the portfolios of Korean life insurers, as of June last year. 


Siew Wai Wan, senior director for insurance at Fitch Ratings, believes life insurers will keep adding to both areas in an effort to secure higher yields and source long-duration assets, as they seek to offset increasing long-term product sales. Others agree. 

“Most Korean insurers must lengthen their asset duration to reduce asset-liability duration mismatches and we expect the trend will continue this year and in 2021,” said Rick Wei, head of Asia ex-Japan insurance strategy at JP Morgan Asset Management.

In particular, the insurers look set to keep adding investments in high quality bonds in US and Europe with AAA-A ranges. 

They are also likely to add to the tens of billions of dollars they have already piled into overseas infrastructure, private debt and real estate, said Wei. Key areas of focus to date have included overseas commercial real estate and government-backed infrastructure investments, often in the US and Europe.

That appetite could yet become a problem if the insurers venture outside tried and tested asset areas, warn observers.  

“We urge investors to exercise caution when investing into unfamiliar strategies. Within alternative asset classes, we believe core real assets in developed markets will outperform opportunistic strategies in a scenario of slowing global economic growth and help build portfolio resilience for insurers,” Wei said.

As they make these investments, the life insurers will also need to closely monitor the K-ICS rules. It is possible the new standards could include penalties for holding such alternative assets, Shin pointed out.


The life insurers are also pressing for a liberalisation in their investing restrictions. 

Currently the companies are restricted to investing 30% of their total assets in foreign markets, and some are nearing this threshold. As of the third quarter in 2019, Hanwha Life and DB Insurance had invested more than 25% of their total assets in foreign markets. Others, such as Kyobo Life Insurance and Mirae Asset Life, have invested more than 20% of their assets overseas.

However, insurers and KLIA argue the limit should be increased to 50% to allow for sustainable growth. A revision bill at the National Assembly is pending, and lawmakers looked to be on track to pass the revision in a planned plenary session slated for mid to late March. 

Provided it passes, life insurers will be able to raise their overseas investments to offset domestic setbacks. 

Korea’s insurance industry may be in flux, but it appears increasingly likely the country will end up with fewer but certainly larger insurers. Many of the survivors are likely to end up affiliated to their large financial groups, and all of them will want to keep expanding offshore and investing in alternatives, ahead of the rules updates to come. 

The insurers have little choice. Korea’s economy and its demographics are not likely to change any time soon. 

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