Fitch Ratings forecasts that Korean insurers will sustain profitability through ongoing growth in new contractual service margin (CSM). The rating agency added that a steady increase in the release of CSM, driven by strong underwriting performance, will continue to support profitability in the sector.
Korean insurers saw a 46% rise in net profits in 2023, primarily due to the introduction of the IFRS17 accounting standard and the robust amortisation of CSM. Increased sales of protection-type products further supported this growth.
However, Fitch does not expect insurers to replicate the same level of growth in 2024, as the accounting change will no longer be a contributing factor.
Insurers are optimising their business by focusing on new business with high CSM, such as protection-type and long-term products. The negative spread from high guarantee policies was recognised at the transition to IFRS17 and IFRS9 standards in 2023.
Fitch noted that despite tighter capital requirements, capital adequacy ratios under the Korean Insurance Capital Standard (K-ICS) improved to 232.2% by the end of 2023. The impact of K-ICS adoption on capitalisation varied depending on insurers’ risk profiles and capital structures.
The rating agency expects insurers to face decreasing capital due to tightened discount rates and the gradual recognition of transitional measures.
However, this is likely to be mitigated by growth in new business CSM. “Insurers with weaker capital positions could reinforce their capital by issuing supplementary capital or utilising reinsurance,” Fitch said.
Investment volatility
Despite a strategic shift toward CSM-friendly business, volatility in investment returns due to the accounting change and movements in interest rates could challenge the stability of insurers’ profitability.
With tighter discount rates and an expected decline in interest rates, insurers will place greater emphasis on asset-liability duration management.
Fitch believes that Korean insurers will continue to extend asset duration by acquiring more domestic long-term fixed-income securities to match their longer-duration insurance liabilities. This strategy aims to reduce the interest rate sensitivity of their capital positions.
Fitch expects insurers to be more active in managing asset allocation in response to the risk charges under K-ICS. Insurers will likely reduce overseas investments due to less attractive yields and rising hedging costs.
Although sizeable real-estate investments could pose a risk, most insurers maintain sufficient capital buffers to absorb these potential risks.
In summary, Fitch Ratings anticipates that Korean insurers will maintain profitability through the continued growth of CSM, despite potential challenges from tighter discount rates and investment return volatility. The sector’s focus on high CSM products and proactive asset-liability management will be crucial in navigating these challenges.
