Korean insurers look to private markets as new regulations take hold
Insurers in Korea are adapting to new regulatory standards and finding the most attractive investments in private markets, or alternatives, following the International Financial Reporting Standards 17 (IFRS 17) framework for risk-based capital (RBC), delegates heard at AsianInvestor’s 16th Institutional Investment Forum Korea in Seoul.
“We have been paying attention to the continuous RBC development for several years, but it has undergone a lot of change [since] 2023. At the same time, IFRS 17 has changed [its framework] a lot, so in terms of our portfolio and investments, we have more considerations to make,” Han Woong, head of the private equity and private debt team at Hyundai Marine and Fire Insurance, said on stage on June 21.
These new frameworks are, among other things, influencing capital requirements related to investments, and risk-based capital in particular. Private market assets with relatively high capital requirements — equity in particular — are now being scrutinised.
“As IFRS 17 is implemented, we are seeing the pressure from this regulation,” Hwang Seong Bae, CIO at DB Insurance, said on stage.
Furthermore, Korean regulators have developed the Korean Insurance Capital Standard (K-ICS), a new risk capital regulation aligning to some degree with IFRS 17 by referencing both EU Solvency II and the Insurance Capital Standard (ICS). Both K-ICS and IFRS 17 came into effect on January 1, 2023, and have been gradually rolled out.
“Under K-ICS, because the risk of equity has increased, we have preferred private debt and senior debt, and we still do, despite a lot of constraints in private debt,” Han said.
FINDING OPPORTUNITIES
For Shinhan Life Insurance, its K-ICS capital ratio is among the highest among Korea’s 22 life insurers, according to Chung Mikyung, general manager and head of investment assessment in the life insurer’s investment management group.
“There are a lot of regulation changes that are taking place in Korea, and we've been making efforts for a long time to prepare, also for the IFRS 17,” Chung said on stage.
However, one of the reasons for the benign capital ratio is that Shinhan Life has a relatively low share of alternative investments in its portfolio, leading to less pressure on capital requirements. The insurer plans to exploit this situation to expand its alternative investments, which currently stand at 15.8% of its total portfolio.
“A lot of alternative assets valuations went up in recent years, so we minimised our new investment in alternative assets. We are now ready to make a fresh investment worth a total of W1 trillion ($723 million) per year,” Chung said.
After joining Shinhan Life earlier this year, she and her colleagues are now working on dividing the existing portfolio into core and non-core assets as new investments and strategies are added.
“We want to source new investment vehicles that are appropriate under the high interest rate environment. The secondary market is growing quite quickly in real estate, infrastructure, and also in private equity and private debt, but we are mindful of large amounts of dry powder,” Chung said.
NEW PREFERENCES
Han from Hyundai Marine and Fire Insurance pointed out that the insurers are now seeing more clarity in how regulators are assessing various asset classes, including alternative investments.
“In the second half of 2024, the new system [would have] been around for two years, so I think we've settled down. It means that we can internally focus on our need to improve returns,” Han said.
With regulations and higher interest rates as the backdrop, new preferences are taking shape as interest rates are projected to be lowered.
“We expect rate cuts happening in the second half of 2024, and we want to identify sectors where valuation will go up, like secondaries in private equity buyouts, when cuts happen,” DB Insurance’s Hwan said.
“Private debt is also another area that we look at,” he added. “However, there are areas where we must achieve excess return, and private equity is an area that we focus on for that, as we manage our vintage appropriately.”