Could Asset-Intensive Reinsurance Be the Solution for Insurers’ Capital Management?

A Tool for Enhancing Capital Efficiency and Asset Management Yields
Spreading Trend Among Global Insurers
"Risk Management Must Go Hand in Hand... Policy Discussions Needed"

The insurance industry is turning its attention to asset-intensive reinsurance as a new alternative to address the burden of high-interest guaranteed insurance policies and the strengthening of capital regulations. Asset-intensive reinsurance is gaining attention as a tool that allows insurers to transfer not only liabilities but also risks arising from asset management, thus enabling them to respond to the new accounting and solvency regime.

A New Card to Ease Insurers' Capital Burden... Growing Interest in Asset-Intensive Reinsurance

According to the financial sector on the 17th, discussions are expanding within the insurance industry regarding the use of asset-intensive reinsurance as a means to cope with stricter capital regulations and the burden of high-interest guaranteed insurance policies.

The background to the insurance industry's interest in asset-intensive reinsurance transactions lies in the increased capital burden brought on by the introduction of the new accounting standard (IFRS17) and the new risk-based capital regime (K-ICS). As insurance liabilities are now valued at market value, the burden of high-interest guaranteed insurance policies sold in the 1990s and 2000s has grown significantly. With a prolonged low interest rate environment compared to the past, insurers are facing a situation where their available capital is shrinking due to negative spread pressure, while their interest rate risk is increasing.

In particular, when the basic capital K-ICS ratio regime is implemented in 2027, insurers will need to pay more attention to managing basic capital centered on common stock and retained earnings, rather than relying on supplementary capital such as subordinated bonds or hybrid securities. This means it will become difficult to respond by simply issuing capital securities as in the past.

Asset-intensive reinsurance is being discussed as an alternative to alleviate such burdens. While traditional reinsurance focuses on transferring insurance risks such as mortality or longevity, asset-intensive reinsurance transfers not only insurance liabilities but also investment risk arising from the asset management process. Insurers can thus reduce interest rate risk and capital burden, while reinsurers can generate additional profits by managing the assets transferred to them. Some reinsurers are strengthening their high-yield asset management capabilities by partnering with global private equity funds to invest in private credit and alternative assets.

To date, the asset-intensive reinsurance market has grown rapidly in the United States, driven by private equity funds entering the insurance industry. Insurers found it difficult to sustain high guaranteed interest rates through government bond-focused investments alone, while private equity funds entered the insurance sector to secure stable premium income and generate investment and fee revenues. In Japan, the economic value-based solvency ratio (ESR) regime was introduced in March, requiring insurance liabilities to be valued at market value, which heightened the need for insurers to manage interest rate risk. As a result, "block transactions" in which high-interest guaranteed insurance policies are transferred to reinsurers have become increasingly active. Indeed, in Japan, asset-intensive reinsurance transactions involving individual annuity, whole life, and pension insurance products have been taking place one after another in recent years.

"Korean Insurers Should Also Consider Utilizing Asset-Intensive Reinsurance... Strategic Discussion Needed"

In Korea as well, the need to enhance the competitiveness of annuity and savings-type insurance is growing in response to an aging population and increasing demand for retirement income security. Industry observers note that asset-intensive reinsurance could be used as a means to reduce negative spread pressure and boost the competitiveness of annuity insurance yields at the same time.

However, there are considerable risk concerns. The private credit market, which has been a key driver of the recent growth in asset-intensive reinsurance, is now facing increased redemption requests and concerns about soundness. Additional major risk factors include recapture risk, where insurers may have to take back assets and liabilities if the reinsurance contract is terminated early, and counterparty risk, which refers to the possibility of reinsurer insolvency.

The International Association of Insurance Supervisors (IAIS) is also engaged in ongoing discussions to strengthen risk management in response to the rapid growth of the asset-intensive reinsurance market. There is analysis that issues such as the uncertainty of valuing unlisted assets, regulatory differences arising from cross-border transactions, and the concentration of transactions with specific reinsurers must be examined.

Hee-Woo Park, a research fellow at the Korea Insurance Research Institute, stated, "Insurers need to strategically review the effects of entering into asset-intensive reinsurance transactions," adding, "It is also important to develop risk management measures to minimize credit risk and recapture risk that may arise in the course of reinsurance transactions." He further emphasized the need for policy discussions that balance policyholder protection with market activation regarding regulatory factors that could restrict asset-intensive reinsurance transactions, such as the requirement for foreign reinsurers' branches to hold domestic assets.

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