South Korean life insurers are increasingly challenged to maintain capital soundness as they grapple with regulatory capital reforms. Several have turned to issuing debt and seeking M&A options to broaden their capital base, said Fitch Ratings.
Premium growth is only modest from market saturation, while financial performance is likely to be boosted by gradually rising interest rates, which helps to raise investment income and abate the negative spread burden.
Regulatory risk-based capital (RBC) has fallen gradually due to tightening regulations – from close to 350% in 2012 to below 300% in September 2017. Regulatory initiatives have thus far centred on improving the industry’s financial health and preparing for IFRS17 implementation in 2021. These include:
- increasing confidence level used to calculate various risk factors under RBC regime to 99% from 95%;
- gradually lengthening the maximum duration of insurance liabilities from 20 years to 30 years under RBC calculation; and
- applying regulatory RBC regime on a consolidated group basis.
The Bank of Korea raised the base rate to 1.5% from 1.25% in November 2017, the first such hike in six years. This paves the way to reverse the trend of a lingering low-interest-rate environment, which could in turn boost profitability and spur premium growth – thereby easing
the negative-spread burden prevalent in the Korean market.
The negative-spread burden arose in the 1990s when actual investment returns fell below guaranteed interest rates of 8-9% offered on endowment policies. The prolonged low-interest-rate environment has also prompted insurers to pursue overseas investment opportunities to enhance yield.
Several life insurers started to issue debt during 2017 to reinforce capital buffers in preparation for IFRS17. In July 2017, Kyobo Life Insurance issued $500m in subordinated securities. In October 2017, Heungkuk Life Insurance also issued $500m in sub debt. Fitch believes this trend will continue as life insurers prepare to meet the higher capital requirements when IFRS17 is implemented.
Rising M&A
Fitch expects the life industry to be swept by an increase in M&A activity – either amongst life insurers at the risk of falling short of the higher capital requirements, or by financial conglomerates looking to diversify their businesses.
Several financial groups including KB Financial Group and Shinhan Financial Group announced their interest in late 2017/early 2018 in acquiring ING Life Insurance Korea. Mirae Asset Life Insurance has recently completed its acquisition and integration with PCA Life Insurance.
Regulations
The regulator is developing rules by end-2018 to evaluate the magnitude and extent of risk contagion in a financial conglomerate (including insurance). The proposed framework will examine the presence of material intra-group transactions, loopholes in key management appointment processes, governance structure and reputation risks that may occur among various related entities within the financial conglomerate. A