Life Insurance Overseas Investment 112 Trillion Won... "Concerns Over Stranding Due to COVID-19 Induced Exchange Rate Fluctuations" (Comprehensive)

Increasing Overseas Investments to Boost Low-Interest Operation Yields

Exchange Rate Volatility Expands Since COVID-19 Outbreak

Life Insurers Contemplate Exchange Rate Countermeasures

[Asia Economy Reporter Oh Hyung-gil] Life insurance companies are facing increased foreign exchange hedging risks due to heightened exchange rate volatility caused by the spread of the novel coronavirus disease (COVID-19). Life insurers, which have continuously expanded their investment scale overseas, are showing signs of deepening concerns as they devise exchange rate response measures amid the adverse effects of COVID-19.

According to the Life Insurance Association on the 2nd, the investment scale in foreign currency securities by 24 domestic life insurers reached KRW 112.5698 trillion as of January, a sharp increase of 13.3% from KRW 99.3616 trillion in the same month last year.

Hanwha Life held the largest overseas securities investment at KRW 28.1217 trillion, marking a 14.2% increase compared to the same period last year. This accounted for 28.9% of its total managed assets of KRW 97.1349 trillion.

Kyobo Life’s overseas securities investment also rose significantly from KRW 16.1785 trillion to KRW 20.3104 trillion over one year, an increase of 25.5%. Its share of total managed assets grew from 20.3% last year to 23.6%.

Samsung Life followed with KRW 17.3082 trillion, then NongHyup Life with KRW 13.5008 trillion, Tongyang Life with KRW 7.007 trillion, and Heungkuk Life with KRW 4.0516 trillion.

Among small and medium-sized companies, KDB Life and AIA Life saw slight decreases in foreign currency securities investments. This is interpreted as a sign that active overseas securities investments are being led mainly by large companies recently.

Life insurers had no choice but to turn overseas instead of the domestic bond market as the low interest rate environment persisted last year, causing an interest rate spread loss due to their inability to raise asset management yields to the promised interest rates to customers.

Although there is a shortage of long-term domestic bonds, they aimed to increase asset management yields through overseas bonds while reducing the maturity mismatch (duration gap) between assets and liabilities by making long-term asset investments. This was a preemptive measure to respond to the introduction of the new International Financial Reporting Standard for insurance contracts (IFRS 17) and the new solvency regime (K-ICS).

However, after the COVID-19 outbreak, the won-dollar exchange rate has repeatedly surged and plunged, increasing foreign exchange hedging risks. While there is no loss risk from exchange rate fluctuations if a hedging contract is in place, the maturity of hedging products is coming due, requiring rollovers, and exchange rate fluctuations are likely to become a burden. There are even warnings that the actively secured overseas assets could turn into risky assets.

Additionally, when conducting foreign exchange hedging, a margin system is used, which could also trigger liquidity emergencies. Dollar deposits (government bonds) may be required as margin, and if won deposits are used as collateral, the decline in the value of won deposits weakens collateral value, potentially causing double losses.

Life insurers are actively preparing countermeasures, such as revising response scenarios to exchange rate volatility. A Hanwha Life official said, "Considering current exchange rate fluctuations, we have established foreign exchange hedging measures through the first half of this year," adding, "So far, overseas bond profits have been higher, so it is not a problem, but we plan to monitor exchange rate trends after the second half and respond accordingly."

A Samsung Life official also stated, "Most overseas bonds are long-term with a maturity of five years, so there is no immediate significant impact from exchange rate fluctuations," but added, "We are responding with a strategy to minimize exposure to exchange rate volatility and are closely monitoring future developments."

Experts are concerned about profit deterioration due to increased costs from sudden exchange rate fluctuations.

Lim Jun-hwan, Senior Research Fellow at the Korea Insurance Research Institute, warned, "Since COVID-19, a storm of exchange rate volatility has been blowing, and it is uncertain whether it will intensify or subside soon," adding, "If you sail a ship in such conditions, it could run aground."

He further advised, "Since domestic life insurers do not have large capital bases and may not be able to endure, partially suspending overseas asset management and observing the situation could be another way to overcome the crisis."