Moody’s Investors Services has maintained its stable outlook on the Korean life insurance sector, citing an improved product mix and stable capitalisation.
These factors are balanced against a decline in demand, driven by the product shift together with subdued economic growth.
Upcoming changes to the local risk-based capital (RBC) system are also expected to further tighten the recognition of interest-rate, credit and market risks and promote stronger capital management in the medium term.
This will improve the ability of the insurers to withstand distress, Moody’s noted, but will also reduce their reported capital metrics.
“Upcoming tighter regulations will continue to drive insurers to shift away from traditional savings-type and annuity products towards protection and variable-type products,” said Young Kim, a Moody’s Analyst.
“The growth in particular in protection-type products will support underwriting performance, as these products carry higher margins and are less sensitive to interest rates than savings-type products, although they also incur higher acquisition costs,” Kim explained.
Moody’s anticipates that Korean life insurers will maintain a steady pace of capital issuance in the medium term to keep capital metrics stable.
Meanwhile, low domestic interest rates will continue to drive overseas investments, which are raising foreign-exchange risk as high U.S dollar hedging costs have caused insurers to use short-term hedging instruments, in turn exposing them to rollover risk.
However, analysts suggested that this risk is somewhat mitigated by the recent tightening of regulations on overseas investment, meaning the overall risk from overseas investment will remain conservative and manageable.
