Korean insurers turn to private markets as new rules come into effect | Highlights

Insurers in Korea are adapting to new regulatory standards and finding the most attractive investments in private markets or alternatives, in line with the International Financial Reporting Standards 17 (IFRS 17) framework for risk-based capital (RBC), delegates at the conference heard. Asian investor XVI Korea Institutional Investment Forum in Seoul.

“We have been paying attention to the continuous development of RBC for several years, but it has undergone many changes since 2023. At the same time, IFRS 17 has changed a lot, so in terms of our portfolio and investment, we have more to consider,” Han Woong, head of the private equity and private debt team at Hyundai Marine and Fire Insurance, said on stage on June 21.

This new framework affects, among other things, capital requirements related to investments, and in particular risk-based capital. Private market assets with relatively high capital requirements – in particular equity capital – are now under scrutiny.

“With the implementation of IFRS 17, we are feeling the pressure of these regulations,” Hwang Seong Bae, CIO of DB Insurance, said on stage.

In addition, Korean regulators have developed the Korean Insurance Capital Standard (K-ICS), a new risk capital regulation that has some overlap with IFRS 17, referencing both EU Solvency II and the Insurance Capital Standard (ICS). Both K-ICS and IFRS 17 entered into force on January 1, 2023, and were gradually implemented.

“Under K-ICS, due to the increase in equity risk, we preferred private debt and senior debt, and we continue to do so despite many constraints on private debt,” Han said.

FINDING OPPORTUNITIES

According to Chung Mikyung, CEO and head of the investment evaluation department of the company’s investment management group, Shinhan Life Insurance’s K-ICS capital ratio is among the highest among 22 Korean life insurers.

“There are a lot of regulatory changes happening in Korea and we have been making efforts to prepare for them for a long time, including IFRS 17,” Chung said on stage.

However, one of the reasons for the soft capital ratio is that Shinhan Life has a relatively low share of alternative investments in its portfolio, which leads to less pressure on capital requirements. The insurer plans to use this situation to expand its alternative investments, which currently account for 15.8% of its total portfolio.

“In recent years, many alternative assets have been valued higher, so we have minimized our new investment in alternative assets. Now, we are ready to make a total new investment of W1 trillion (US$723 million) per year,” Chung said.

After joining Shinhan Life earlier this year, she and her colleagues are now working to split the existing portfolio into core and non-core assets as they add new investments and strategies.

“We want to get new investment vehicles that are relevant in a high-interest environment. The secondary market is growing quite fast in real estate, infrastructure, private equity and private debt, but we are aware of a lot of dry powder,” Chung said.

NEW PREFERENCES

Han of Hyundai Marine and Fire Insurance noted that insurers now see greater transparency in how regulators evaluate different asset classes, including alternative investments.

“In the second half of 2024, the new system (will) have been in effect for two years, so I think we have calmed down. This means we can focus internally on our need to improve returns,” Han said.

Against the backdrop of regulation and higher interest rates, new preferences are emerging as interest rates are expected to fall.

“We expect interest rate cuts in the second half of 2024 and want to identify sectors where valuations will rise, such as secondary markets in private equity buyouts when rates are cut,” DB Insurance’s Hwan said.

“Private debt is another area we’re looking at,” he added. “But there are areas where we need to achieve excess returns, and private equity is an area we’re focused on as we manage our vintage.”