Korean insurers are expected to sustain their profitability through continued growth in new contractual service margin (CSM), says Fitch Ratings.
The global credit rating agency, in a report titled “Korean Insurance Dashboard: June 2024”, said, “We believe a steady increase in new business CSM will continue to support their capitalisation and operating results through amortisation of CSM.”
Insurers continue to reshape their operating and investment strategies, focusing on value-added products that offer a higher level of CSM and reducing allocation to assets that carry higher capital charges. With the tightening in discount rates and interest rate movements, Fitch expects insurers to be more active in managing asset-liability duration to secure better capital stability, primarily by acquiring more domestic long-term fixed-income type securities.
Korean insurers have a sizeable investment in real estate, mainly in project financing loans and overseas commercial real estate, but Fitch assesses that the impact from potential impairments in the related investments will be manageable relative to the insurers’ overall capital buffers.
Korean insurers’ net profits rose by 46% in 2023, driven by the change in accounting standards to IFRS17 as well as sound amortisation of CSM, which was bolstered by increased sales of protection-type products. Fitch does not expect the insurers to repeat the same level of growth in 2024 because the accounting change will no longer be a factor.
Capital adequacy
Capital adequacy ratios under K-ICS improved to 232.2% by end-2023, even with a tighter capital requirement. However, the impact on capitalisation as a result of K-ICS adoption varied, depending on insurers’ risk profiles and capital structures.
Fitch expects the insurers to face decreasing capital due to tightened discount rates and the gradual recognition of transitional measures. However, this will likely be mitigated by growth in new business CSM. Insurers with weaker capital positions could reinforce their capital by issuing supplementary capital or utilising reinsurance.