Korean insurers are expected to adopt a more proactive approach to managing asset allocation, although their current investment mixes are unlikely to change markedly, says Fitch Ratings.
In a report titled "Korean Insurers: Understanding Asset Risks", Fitch expects insurers to finetune their portfolios to address duration gaps and the risk charges under K-ICS.
The global credit rating agency says that 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 says that the ongoing release of CSM will enhance insurance revenue recognition in income statements.
However, the investment returns of insurers recognised under IFRS 17 and IFRS 9 could be more volatile. Therefore, Fitch believes that effective investment risk management is crucial for Korean insurers.
Investments
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, Fitch expects insurers to gradually reduce these exposures to achieve a balance between the asset risk charges and additional returns.
Fitch also says that it expects the risks to insurers' 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, Fitch believes that the potential losses in these investments will be manageable relative to the insurers’ overall capital buffers.
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, Fitch expects insurers to gradually reduce these exposures to achieve a balance between the asset risk charges and additional returns.
Fitch expects the risks to insurers' 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, Fitch believes that the impact from potential losses in these investments will be manageable relative to the insurers’ overall capital buffers.