Korean insurers face volatile investment returns under new IFRS

Stricter K-ICS risk charges prompt portfolio adjustments.

Korean insurers are expected to maintain relatively strong earnings performance in the near term due to their focus on protection-type long-term insurance, which typically offers better contractual service margins (CSM), according to Fitch Ratings.

The ongoing release of CSM will boost insurance revenue recognition in income statements. 

However, investment returns under IFRS 17 and IFRS 9 may be more volatile, highlighting the need for effective investment risk management.

Fitch anticipates that Korean insurers will adopt a more proactive approach to asset allocation, though significant changes in their current investment mixes are unlikely. 

Insurers are expected to adjust portfolios to address duration gaps and risk charges under K-ICS.

In recent years, Korean insurers have shifted funds into higher-yielding alternative investments to diversify and enhance returns. 

Due to stricter risk charges under K-ICS compared to the previous RBC regime, insurers are likely to gradually reduce these exposures to balance asset risk charges with returns.

The risks from real-estate investments and domestic project financing loans are considered manageable. 

Despite increased exposure to these areas during low interest rates, the current unfavourable conditions are expected to have a manageable impact relative to the insurers’ overall capital buffers.