The Korean insurance sector has been assessed by Moody’s as being stable.
The agency said that this was underpinned by its expectation of rising interest rates and the transition to a new capital regime, which will support insurers’ profitability, capitalisation, and asset quality.
Gil Jo, analyst at Moody’s said: “We expect Korean life insurers’ profitability will recover in the next 12-18 months. Interest margins will improve moderately because of rising interest rates, while risk margins will rebound on the back of new business growth from sales of protection products.”
The firm said that interest margins will improve moderately due to rising interest rates, while capitalization will remain stable as insurers transition to meet requirements under new capital regime. Meanwhile, rising long-term fixed investment will support asset quality, but financial market volatility remains a key credit risk
Moody’s also said that risk margins are unlikely to return to pre-pandemic levels because of the maturing and competitive industry and Korea’s aging demographic, which will cap new business growth in protection products.
It added that capitalisation will remain stable, with insurers aiming to have sufficient buffers to transition to the Korean Insurance Capital Standard (K-ICS) and the International Financial Reporting Standards 17 (IFRS 17), which come into effect in January 2023. Insurers will over the next year accelerate their capital securities issuances to meet the new capital requirements. Their local risk-based capital (RBC) ratios could drop further because of rapidly rising interest rates, but their solvency under K-ICS and IFRS 17 will benefit from the rising rates because of asset-liability duration mismatches.
Rising long-term fixed income investment will underpin life insurers’ asset quality, but heightened financial market volatility remains a key credit risk. Insurers will allocate more funds to long-term domestic bonds and reduce their holdings in high-risk assets. They will also not proactively increase their holdings of overseas assets because of low real returns and burdensome hedging costs amid heightened foreign exchange (FX) volatility. Meanwhile, they will maintain their alternative investments – mainly project financing loans – to secure stable cash flow and enhance investment yields.
