Korean insurers are being driven to adapt their strategies, moving towards lower-risk products as they contend with the challenges posed by new accounting standards—specifically IFRS 17 and IFRS 9—and declining interest rates, according to S&P Global Ratings.
The implementation of IFRS 17, which requires insurance liabilities to be assessed using market-consistent interest rates, has exposed insurers’ capital sensitivity to interest rate movements more clearly than previous accounting practices under IFRS 4. As a result, insurers with long-term liabilities, particularly life insurers, are now facing heightened pressure to manage interest-rate risks and ensure capital adequacy. This comes at a time when falling interest rates, sparked by the recent cuts from the U.S. Federal Reserve, are deepening the duration mismatch between assets and liabilities.
Long-Term Liabilities at Risk
S&P highlights that Korean life insurers are especially vulnerable due to the longer duration of their liabilities compared to their assets. The declining discount rates used to value these liabilities are squeezing their capital positions. Non-life insurers offering long-term policies are similarly affected, facing challenges in managing the asset-liability mismatch brought on by falling interest rates.
To prepare for these changes, many insurers have been investing in long-dated bonds, selling products with less sensitivity to interest-rate fluctuations, and adopting risk-transfer strategies such as co-insurance. These actions, along with profitability improvements under IFRS 17, have helped cushion the impact of capital pressures for many insurers.
However, despite these efforts, the discount rate set by Korea’s financial regulator—comprised of a market risk-free rate and a liquidity premium—will continue to put strain on insurers. Planned regulatory changes, including extending the last liquid point to 30 years by 2025 and reducing the ultimate forward rate, are expected to lower the discount rate curve further over the coming years.
Capital Adequacy Challenges
While many insurers have made progress in managing their asset-liability durations, S&P warns that firms like Hanwha Life Insurance and Hyundai Marine & Fire Insurance may still face capital adequacy challenges. These insurers have lower solvency ratios compared to the industry average and could see their capital adequacy ratios drop by 5 to 15 percentage points with just a 100 basis point decrease in the yield of 10-year Korean government bonds.
In contrast, Samsung Fire & Marine Insurance is better positioned. Its robust asset-liability management and conservative actuarial practices are expected to sustain its capital strength over the next two years, according to S&P.
Shift Toward Risk Management and Lower-Risk Products
Amid these regulatory and financial pressures, Korean insurers are tightening their risk management strategies. They are focusing on narrowing the duration gap between assets and liabilities and shifting their product portfolios towards policies that are less sensitive to interest-rate movements.
Insurers with limited regulatory solvency headroom are exploring options like co-insurance and issuing hybrid instruments to strengthen their capital reserves. However, S&P notes that these approaches carry potential profitability concerns, as the cost of risk-transfer strategies and hybrid issuance could weigh on insurers’ bottom lines.
Profitability and Financial Stability Under IFRS 17
As interest rates continue to decline, managing capital volatility under IFRS 17 will become a critical measure of insurers’ financial stability. While moderate capital pressure is expected in the near term, S&P projects that profitability improvements under the new accounting standards will provide a buffer against these challenges, helping insurers navigate the evolving regulatory landscape.
The overall outlook for Korean insurers hinges on their ability to adapt to these pressures, balancing the need for risk management with strategies to maintain profitability and capital strength.
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