Outlook for South Korea’s Life insurance Industry Stable, Says Moody’s Investors Service

Moody’s Investors Service has recently announced that it has a stable outlook for South Korea’s Life insurance industry, with a focus on the growth in contractual service margins (CSM) and prudent investment strategies that are expected to support capitalization and profitability in the next 12-18 months.

The global credit agency highlighted that the growth in insurance revenue and recurring investment profit will play a key role in supporting profitability within the industry. Insurers are strategically focusing on selling high-margin products, which is expected to drive growth in insurance revenue. Additionally, the still-high interest rates in South Korea will support recurring interest income. However, Moody’s also pointed out that escalating underwriting expenses, a result of intensifying competition to sell high-margin products, may somewhat offset these positive factors.

In terms of asset quality, Moody’s expects it to remain stable as insurers maintain prudent investment strategies. Insurers are continuing to focus on high-quality domestic bonds with long maturities in response to increased risk charges for risky asset classes under the Korea Insurance Capital Standard (K-ICS) and to match asset-liability durations. While investments in overseas commercial properties pose risks, Moody’s believes that the impact on profitability and capitalization is manageable.

Capitalization within the industry is expected to remain stable despite scheduled revisions of economic assumptions. Adjustments of economic assumptions that lower discount rates may adversely affect life insurers’ capitalization. However, most insurers’ solvency under the K-ICS is expected to remain around 2023 levels, supported by stabilizing interest rates and growth in new business CSM.

Moody’s also noted that liquidity pressure has eased as policy lapses stabilize after spikes in late 2022. While there may be some surrenders by policyholders facing financial difficulties amid prolonged economic challenges, Moody’s does not anticipate lapses to sharply increase again. This easing of liquidity risks, along with reduced refinancing requirements and high funding costs, is expected to lead to a decrease in the issuance of capital securities by life insurers.

However, Moody’s did caution that the outlook could shift to negative if there is a substantial deterioration in capital markets that increases asset risks from life insurers’ alternative investments, a swift and significant decrease in interest rates leading to a substantial decline in insurers’ investment income and spread margin, or an increase in lapses that significantly raises liquidity risks for insurers.

Overall, Moody’s stable outlook for South Korea’s Life insurance industry reflects its expectation that growth in CSM and prudent investment strategies will support capitalization and profitability in the coming months. Insurers’ focus on high-margin products and stable asset quality are key factors contributing to this positive outlook.