Increased Financial Volatility Due to COVID-19... "Insurance Companies' Asset Insolvency Must Be Closely Monitored"

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[Asia Economy Reporter Oh Hyung-gil] As the spread of the novel coronavirus infection (COVID-19) increases volatility in the financial markets, concerns have been raised that insurance companies' asset values may decline and profitability may decrease, simultaneously worsening both soundness and profitability.

On the 12th, Hwang In-chang, a research fellow at the Korea Insurance Research Institute, stated in the report "Increased Financial Market Volatility and the Insurance Industry's Response" that "The spread of COVID-19 has shocked both demand and supply, contracting the real economy and increasing the possibility of an economic recession, leading to increased volatility in the financial markets."

According to the report, the economic downturn caused by the spread of COVID-19 has led to increased financial market volatility, including a decline in the value of risky assets and a rise in the value of safe assets.

In particular, it was explained that declines in stock prices, widening credit spreads, falling real estate prices, declining interest rates, and a stronger dollar value can be observed.

Research fellow Hwang explained, "Declines in stock prices, widening credit spreads, and falling real estate prices reduce the value of risky assets held by insurance companies, decreasing asset values and increasing guarantee reserves, which in turn reduces the net asset value of insurance companies." He added, "While declining interest rates increase the value of held bonds, they also increase the value of LAT reserves and general and variable guarantee reserves, which are subject to market valuation."

He continued, "In particular, declining interest rates reduce the yield on new bond investments, leading to a decrease in operating asset returns for insurance companies that primarily invest in bonds. A stronger dollar value positively increases the won value of foreign currency securities, but it also raises hedging costs and creates difficulties in margin management when hedging is done through derivatives."

It was forecasted that for life insurance companies, which have a relatively high proportion of overseas investments, the increase in hedging costs due to a stronger dollar and difficulties in margin management will be the biggest issues.

For non-life insurance companies, which have a relatively high proportion of investment trusts and risky loans, the biggest problem is expected to be the decline in the value of held assets caused by falling stock prices, widening credit spreads, and falling real estate prices.

Research fellow Hwang emphasized, "It is necessary to adjust risks by asset type and correlations between assets to reflect them in stress scenarios, and accordingly reset investment limits and hedging strategies by asset type." He also urged, "Particular attention should be paid to rollover risks and margin management when using derivatives for risk management."

He also suggested, "Financial authorities should closely examine the possibility of a chain reaction spreading due to asset deterioration caused by increased market volatility and economic downturns." He added, "To smoothly provide insurance products and services to consumers, excessive supervisory reporting requirements should not increase the operational burden on insurance companies."

This content was produced with the assistance of AI translation services.