27 May 2014 Insurance

Korean life sector strong despite profitability challenges

The outlook for the Korean life industry remains stable, backed by strong capitalisation and a stable investment mix, despite ongoing profitability challenges, according to rating agency Moody’s.

"We expect insurers' business franchises to be supported in the coming 12-18 months by favourable economic fundamentals and demographic trends, and their capital positions to remain reasonably strong, even after taking into account tightening regulatory requirements," said Stella Ng, a Moody's assistant vice president and analyst.

"Somewhat offsetting these strengths, a low interest rate environment will continue to pressure profitability, because of the high weighting of domestic bonds in life insurers' investment portfolios.”

According to the agency’s just released Korean Life Insurance Outlook, which expresses Moody's expectations of how the creditworthiness of the life insurance industry will evolve in this system over the next 12-18 months, it expects the macroeconomic environment and demographic trends in Korea to remain supportive.

"We expect that the steady economic growth will continue to support a general demand for insurance products, and our baseline scenario assumes GDP growth of 3-4 percent in 2014 and 2015, compared to actual growth of 2.8 percent in 2013," said Ng.

While the Korean life insurance market is largely mature, Moody's expects increasing demand for protection, long-term health care and pension products, which are key drivers of premium growth in an aging society with increasing post-retirement needs.

The investment mix of insurers remains largely conservative, and continues to be driven by large holdings of domestic high-quality bonds and loans, with low exposures to high risk assets such as foreign securities and real estate.

Meanwhile, profitability remains pressured by the persistently low interest rate environment, which Moody's expects to continue in the coming 12-18 months. However, some larger insurers have indicated their intentions to explore overseas opportunities, which could have a mixed impact on their credit profiles.

Moody's also sees solid levels of capitalisation among the Korean life insurers.

"While most insurers already boast capital levels that are well above the current regulatory minimum, a tightening in risk-base capital standards will likely push insurers towards further strengthening their capital buffers and capital management," said Ng.

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