"Regulatory Easing Promised"…Insurance Industry Faces Investment Dilemma in 'Korean New Deal' (Comprehensive)

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 plans to relax supervisory regulations targeting insurance companies regarding New Deal investments. It is known that a method to lower the risk factor of the Risk-Based Capital (RBC) ratio is a likely option.

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

Currently, in the RBC system, 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 alleviate the capital expansion burden caused by investments in these funds.

Attractiveness of New Deal Funds as Long-Term Investment Destinations

In a situation where there is a shortage of long-term investment destinations domestically, the government's emphasis on New Deal funds offering 'higher returns than government bonds' and 'principal protection' adds to their appeal.

The policy-type New Deal fund is structured with the government and policy financial institutions contributing an average of 35%, matched by 65% private capital, with about 10% of government funds invested as subordinated capital to absorb risks. For investors, this means that even if returns fall to -10%, the principal is guaranteed.

Financial Services Commission Chairman Eun Sung-soo emphasized in a briefing on the 3rd, "Although it is not a principal guarantee, it effectively functions as one."

As of the end of 2019, the assets under management by life and non-life insurers amounted to KRW 732 trillion and KRW 261 trillion respectively, totaling KRW 993 trillion. Among these, public sector bonds such as government and public bonds account for 38%, loan receivables 21%, and private sector bonds 7%, meaning 66% of managed assets are concentrated in domestic bond-type products.

Recently, insurers' long-term investments 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 managed assets has increased the most significantly over the past decade. This indicates a failure to secure long-term investment destinations domestically.

A life insurance company official said, "Considering global economic conditions and exchange rate volatility, a strategy prioritizing long-term domestic investments 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, financial soundness is assessed based on a one-year risk 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 further stated, "Various risk transfer methods should also be provided, such as tax benefits or government guarantees or bearing initial losses."

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