Insurance Industry Managing 993 Trillion Won... The Investment Dilemma of the 'Korean New Deal'

Prolonged Low Interest Rates Worsen Profitability
New Deal Fund Attractive for High Returns and Principal Guarantee
"K-ICS Relief Measures Must Be Prepared"

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] The insurance industry, which has been hit in profitability due to the prolonged low-interest-rate environment, is increasingly concerned about the newly emerging investment destination, the 'Korean New Deal.'

Although the government has promised to ease soundness regulations exclusively for New Deal investments, the industry is hesitant to make investment decisions, fearing that the effect may be only a temporary fix. Experts also point out the urgent need to establish regulatory easing measures based on market valuation.

According to financial authorities and the insurance industry on the 7th, the government is reviewing measures to relax supervisory regulations for insurance companies regarding New Deal investments. It is known that a plan to introduce a method of lowering the risk factor of the Risk-Based Capital (RBC) ratio is likely.

The RBC is an indicator of an insurer's ability to pay insurance claims promptly when policyholders request insurance payouts all at once. The Financial Supervisory Service recommends maintaining the RBC ratio above 150%, and insurers whose ratio falls below 100% are subject to timely corrective actions such as capital increase requirements.

Currently, in the RBC, assets with a risk of principal loss have higher risk factors applied to their asset prices. The higher the risk factor, the more capital must be accumulated. The government intends to reduce the risk factor for New Deal funds to ease the capital expansion burden caused by investments in New Deal funds.

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, and Eun Sung-soo, Chairman of the Financial Services Commission, are announcing the 'Korean New Deal Financial Support Plan' at the government Seoul office briefing room on the 3rd. Photo by Moon Ho-nam munonam@

In a situation where there is a lack of long-term investment destinations domestically, the government's emphasis on the New Deal fund offering 'higher returns than government bonds' and 'principal guarantee' is also attractive.

As of the end of 2019, the operating assets of life insurance and non-life insurance companies amounted to 732 trillion won and 261 trillion won, respectively, totaling 993 trillion won. Among these, public sector-issued bonds such as government and public bonds account for 38%, loan bonds 21%, and private sector bonds 7%, meaning 66% of operating assets are concentrated in domestic bond-type products.

Recently, long-term investments by insurance companies have been centered more on overseas assets than domestic ones. According to the Korea Insurance Research Institute, the proportion of foreign currency securities in total operating assets has increased the most significantly over the past 10 years. This indicates that long-term investment destinations have not been secured domestically.

A life insurance company official said, "Considering the volatility of the global economy and exchange rates, a strategy prioritizing long-term investment domestically over overseas is preferred," but added, "The decision to invest will depend on the extent to which RBC regulations are eased."

Experts particularly point out that the new International Financial Reporting Standard (IFRS 17) and the new solvency ratio system (K-ICS 3.0), introduced in 2023, will hinder long-term investments in New Deal funds.

Hwang In-chang, a research fellow at the Korea Insurance Research Institute, diagnosed, "Under K-ICS, risks are assessed over one year for financial soundness evaluation, which not only overestimates long-term investment risks but also imposes the highest level of risk on unlisted financial products."

He added, "It is necessary to prepare easing measures that consider the characteristics of insurers' long-term investments in relation to accounting standards and capital regulations," and "Various risk transfer measures, such as tax benefits or government guarantees or bearing initial losses, should also be provided."

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