Low-Interest Insurance Companies Reach Overseas Investment Limits to the Brink

Industry, Overseas Investment Limit 30% Rule Eased
Expect Passage in 21st National Assembly

[Image source=Yonhap News]

[Asia Economy Reporter Ki Ha-young] "In a situation where the supply of domestic long-term bonds is insufficient, the overseas investment limit for insurance companies is restricted to 30% of managed assets, which hinders effective asset management and securing autonomy." (Shin Yong-gil, Chairman of the Life Insurance Association)

"The regulation on the ratio of overseas asset investment has remained unchanged since 2003, failing to properly reflect the changed financial environment and reality, and acts as an obstacle to efficient asset management by insurance companies." (Yoo Dong-soo, member of the National Assembly's Political Affairs Committee, Democratic Party of Korea)

As the insurance industry moves toward overseas investment in preparation for prolonged low interest rates and the introduction of the new International Financial Reporting Standard for Insurance Contracts (IFRS17), insurance companies are rapidly approaching the investment limit ceiling. In a situation where business contraction due to the novel coronavirus disease (COVID-19) and historically low interest rates inevitably worsen profitability, insurance companies that missed the 'golden time' are strongly demanding amendments to the Insurance Business Act. Although the bill to relax the overseas investment limit to 50% did not pass the 20th National Assembly, attention is focused on whether the amendment will pass as Yoo Dong-soo, who proposed the bill, was re-elected in the 21st National Assembly general election.

According to the industry on the 27th, Hanwha Life's ratio of foreign currency securities to general account managed assets is 28.9%, nearly reaching the overseas investment limit. Fubon Hyundai Life and Chubb Life Insurance are also recording 25.9% and 25.3%, respectively. Tongyang Life (23.7%), Kyobo Life (23.6%), and NH Nonghyup Life (21.4%) also showed overseas investment ratios above 20%.

Under the current Insurance Business Act, insurance companies can invest up to 30% of their managed assets overseas. Overseas investments include foreign currencies, foreign securities, and foreign currency derivatives.

Recently, Fubon Hyundai Life was fined 20 million KRW by the Financial Supervisory Service for exceeding the overseas investment limit. Due to miscalculating the foreign currency asset management limit, they purchased foreign exchange (Taiwan Dollar) in June last year, resulting in a foreign currency asset ratio of 30.03% to 30.09% from June 27 to 30, violating the Insurance Business Act.

Insurance companies facing profitability deterioration due to low interest rates unanimously agree that the overseas investment limit should be raised as soon as possible. In fact, the operating asset yield of life insurance companies, which was 5.6% in 2010, fell to 3.9% in 2016 and dropped further to 3.5% last year.

Among domestic financial sectors, only the insurance industry still has regulations on overseas asset investment limits. Japan abolished overseas investment limit regulations for insurance companies in 2012 as low interest rates became entrenched. Taiwan also increased its investment limits and excluded foreign currency-denominated bonds from the overseas investment limit in 2014. As of the end of last year, the overseas investment ratio of Taiwanese insurance companies accounted for more than 60% of their assets.

The amendment to the Insurance Business Act to raise the overseas investment limit from the current 30% to 50% was discussed in the 20th National Assembly but failed to pass the Legislation and Judiciary Committee. However, with Yoo Dong-soo, who proposed the amendment, winning re-election in the 21st general election, industry expectations are rising.

An industry official said, "With interest rates falling and asset management yields decreasing, it is difficult to find profitable areas domestically," adding, "Regulations on the ratio of overseas asset investments should be promptly eased to diversify investments."

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