Capital regime pressure hits Korean insurers' margins amidst rising claims

New core capital ratio rule is set to tighten balance sheet quality.

South Korea’s insurers might see weaker profits in 2026 due to capitalisation pressure from the new capital regime despite stable contractual service margin (CSM) amortisation.

Rising claims and lower investment yields, driven by declining interest rates, are likely to weigh on earnings, Fitch Ratings said in its APAC Insurance Outlook 2026.

Looking ahead, Fitch expects regulatory relief on discount rate adjustments under Korea Insurance Capital Standard (K-ICS) to ease some capital pressure, although further interest rate cuts remain a risk.

Insurers are expected to continue focusing on protection-type products to grow in-force CSM.

At the same time, the introduction of a core capital ratio requirement is likely to tighten capital quality.

Fitch said insurers may explore additional capital management options, including co-insurance arrangements and the use of internal capital models, whilst expanding sales of higher-margin protection products.

Profitability is expected to weaken in 2026 as claims rise and financial market uncertainty persists.

Although CSM amortisation will help support earnings stability, higher claims, including those following the resolution of medical strikes and from long-term protection business, are likely to put further pressure on margins.

In response, insurers are expected to strengthen underwriting standards and adjust product structures to manage loss ratios.

Continued low interest rates are also expected to limit investment income from traditional fixed-income assets, prompting insurers to pursue diversification and potential acquisitions to stay competitive.

Fitch added that insurers will likely continue managing asset-liability mismatches by increasing investments in long-term domestic bonds and using derivatives such as bond forwards to extend asset duration.

They are also expected to gradually increase exposure to overseas bonds, after hedging, to improve returns.

The agency said insurers will aim to optimise investment portfolios to improve capital efficiency and reduce earnings volatility.

Whilst alternative investments are expected to remain part of portfolios to enhance returns, exposure to higher-risk assets is likely to stay limited.

The industry’s aggregate K-ICS ratio fell to 206.8% by the end of the first half of 2025, down from 232.2% in 2023.

The decline was mainly due to lower discount rates and tighter actuarial assumptions. To support capital, Korean insurers issued around $6.1b (KRW9t) in capital securities in the first 11 months of 2025, following $5.9b (KRW8.7t) in 2024 and $2.2b (KRW3.2t) in 2023.

($1.00 = $1,476.58)