"Base Rate Hike... Insurers Must Reduce Credit Risk and Increase Proportion of Government and Public Bonds"

Financial Imbalance Mitigation Policies and Insurance Industry Report (Source: Korea Insurance Research Institute)

[Asia Economy Reporter Oh Hyung-gil] Following policies to alleviate financial imbalances such as interest rate hikes, insurance companies have been advised to reduce the credit risk of their operating assets, which had expanded in recent years, and increase the proportion of long-term government and public bonds.

Jo Young-hyun, a research fellow at the Korea Insurance Research Institute, stated in the report "Financial Imbalance Alleviation Policies and the Insurance Industry" on the 13th, "Financial authorities are pushing for total household loan volume management, and the Bank of Korea is highly likely to gradually raise the base interest rate with a focus on alleviating financial imbalances."

The report explained that although financial stability has improved due to unprecedented bold liquidity supply policies after COVID-19, financial imbalances have deepened, and the flow of funds has shortened due to increased demand for precautionary short-term funds from households and companies.

Financial imbalance refers to excessive leverage expansion and asset price increases due to strengthened risk appetite among economic agents, and if this deepens, it can lead to increased economic volatility and weakened growth potential and financial stability.

It added, "The current level of financial imbalance is assessed to have a limited impact on the financial system even if there is a real economy shock," but also analyzed, "If financial imbalances worsen further, economic growth and financial stability could be impaired, so it is a time when easing policies by financial authorities and the central bank are necessary."

It predicted that with policies to alleviate financial imbalances such as total household loan volume management and interest rate hikes, the phenomenon of economic agents pursuing higher returns will ease, leading to a slowdown in liquidity growth, mitigation of fund shortening, and expansion of downside risks for risky assets.

The report advised, "Since financial imbalance alleviation policies can affect fund flows, asset prices, and risks, insurance companies need to prepare response strategies in terms of demand for savings and investment-type insurance, asset management, and capital management."

Research fellow Jo suggested, "Demand for savings insurance is expected to change little, while demand for variable insurance is likely to decrease, and surrender rates may rise due to loan constraints. For household loans, the credit risk of unsecured loans needs careful monitoring, and for corporate loans, the repayment ability of vulnerable companies should be closely examined."

Additionally, in response to the normalization of U.S. monetary policy, risks related to overseas alternative investments must be carefully checked. Since a decline in the Risk-Based Capital (RBC) ratio is expected due to rising interest rates, insurance companies that need to enhance solvency through issuing capital securities are advised to proceed with issuance promptly.

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