The performance of Korean life and non-life insurers in 2025 is expected to be stable, with the sector outlook,'Neutral', says Fitch Ratings.
Results are likely to remain steady, due mainly to a consistent widening in the amortised contractual service margin (CSM). However, gradual escalation in the burden of reserving, onerous contract expense management, and lower investment yields from lower interest rates could have a negative impact.
The industry’s aggregate Korea Insurance Capital Standard (K-ICS) ratio, with the transitional measures, declined to 217.3% in 1H2024 from 232.2% in 2023 (1H2024: 201.5% and 2023: 214% without transitional measures), due largely to unexpected discount rate cuts.
Fitch expects resilient capitalisation due to ongoing growth in new business CSM and active asset-liability management. This is despite the upcoming changes in actuarial assumptions, market interest-rate cuts, and additional tightening of the Korean discount rate, with declining long-term forward rates.
Value-focused product mix to continue
Fitch expects insurers to continue to reshape their operating strategy and to focus on long-term protection-type business to enhance new business CSM. This will support the stability of profitability through the release of CSM. However, the benefit could be offset partially by volatility in investment returns due to fluctuations in financial markets. That said, Fitch expects the overall investment results to trend upwards in the short term with higher unrealised gains from lower interest rates.
Capital buffer pressured
The global credit agency expects capitalisation measures under the K-ICS to face pressure due to a declining discount rate, set by the Korean regulator, and expected interest-rate cuts. Insurers with low CSM and dim prospects for new business growth will experience additional strain on capital buffers as they face gradually tighter capital measures. Insurers will have to review funding options and other feasible strategies for capital management. These include issuing debt capital securities to enhance available capital, facilitating additional reinsurance products to lower required capital, and co-insurance arrangements.
Proactive asset-liability management
Fitch believes insurers will continue to assess their capital costs and returns, and manage their asset-liability duration gap proactively in preparation for interest-rate cuts. Insurers have a greater appetite for acquiring domestic long-term bonds and derivative options, such as bond-forwards, to extend the duration of their invested assets. They will gradually increase overseas long-term bonds for asset-duration management, with reduced hedging costs.
Insurers will optimise their investment portfolios to bolster capital efficiency and reduce profit fluctuations, although the current investment mix is unlikely to change significantly. They are unlikely to increase allocation to assets with higher capital charges. Fitch expects insurers to maintain beneficiary certificate investments for better returns, while diversifying their portfolios gradually within this asset type, such as with infrastructure funds.