Funding costs & market volatility to temper Korea insurers’ outlook: S&P

Korean insurers’ profitability outlook is likely to be tempered by higher funding costs and capital market volatility, according to a recent report by S&P Global Ratings analysts. According to the report, despite challenges, Korean life insurers should see modestly higher returns in 2023 and maintain broadly stable profitability into 2024. It also highlighted that investment returns will likely be supported by higher domestic interest rates which will also ease the insurers’ burden of reserve provisioning. At the same time, Korean property & casualty (P/C) insurers have been assigned a stable profitability outlook, which according to S&P, will be underpinned by improving pricing adequacy and strengthening the control of claims and expenses. Higher domestic interest rates will also help their reinvestment returns, although capital market volatility could partly offset the benefits. Korean P/C insurers have limited catastrophe exposure and this comes with effective reinsurance protection, analysts added. “The life insurance sector in Korea faces relatively higher industry risk than the P/C sector. This is mainly attributable to the financial burden from legacy high-yield fixed-rate guaranteed policies. We estimate insurance policies with a guaranteed fixed return of more than 5% representing about 25% of life insurers’ reserves as of June 30, 2022. Low country risk for Korea (AA/Stable/A-1+) somewhat mitigates overall risk for life insurers,” said the rating agency. S&P has assessed the industry and country risk for Korea’s life and P/C insurance sectors as intermediate and it sees the trend for both sectors as stable. In the coming year, despite its well-diversified and resilient economy, Korea will likely face some macroeconomic headwinds S&P analysts stated. These include a slowdown in global demand and high inflation. According to the agency’s forecasts, the country’s economy could grow 1.4% in 2023 and 2.2% in 2024, compared with about 2.7% in 2022. Analysts said: “Korea’s regulatory framework continues to evolve along with the adoption of International Financial Reporting Standard 17 and a new regulatory capital framework, Korea Insurance Capital Standard (K-ICS), from 2023. These developments will enhance the Korean sectors’ compatibility with international insurers and strengthen their asset and liability management. That said, the new accounting principles could introduce more volatility to the insurers’ capitalization. While some insurers, especially life insurers, have supplemented their capitalization with hybrid capital instruments in the past several years ahead of the K-ICS adoption, rising cost of funding and refinancing could somewhat constrain their financial flexibility.” According to the report, profitability for the Korean life insurance sector, as measured by the return on average assets, will likely be stable at about 0.40% in 2023-2024, after modestly recovering from about 0.35% in 2022. This compares to the agency’s forecast for P/C insurers’ return on average assets of about 1.2%-1.3% in 2022-2024. Analysts also noted that, as part of their efforts to prepare for the accounting and regulatory changes next year, life insurers are gradually shifting their product mix toward protection-type products over savings-type products, to enhance their profit margins.

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