Insurance Companies Increasing Alternative Investments... Warning Lights Turned On

[Asia Economy Reporter Oh Hyung-gil] As the low interest rate trend continues in the long term, insurance companies are expanding alternative investments to defend the yield on their operating assets. However, there is an analysis that the rapid increase in alternative investments in recent years may increase financial risks.

According to the Financial Risk Review by the Korea Deposit Insurance Corporation on the 4th, the proportion of safe assets held by life insurance companies decreased by 1.5 percentage points from 55.7% to 54.2% over the past year since the end of 2018, while the proportion of overseas and alternative investments increased by 0.9 percentage points from 34.6% to 35.5%.

Non-life insurance companies also have risky asset operations amounting to 119.5 trillion won as of the end of last year, accounting for 48.6% of the total. In particular, the proportion of alternative investments is increasing among small and medium-sized companies. Looking at the proportion of alternative investments in operating assets, small and medium-sized companies have 37.5%, while large companies have 22.7%, showing a difference.

According to a report released last year by Korea Credit Rating, the scale of overseas alternative investments by 10 major domestic insurance companies increased by 47%, from 10.5 trillion won at the end of 2017 to 15.4 trillion won at the end of June 2019.

Accordingly, global credit rating agency Fitch recently stated, "In the low interest rate environment, alternative investments, one of the risky assets, have attracted attention as an attractive investment destination for Korean insurance companies," adding, "However, potential high investment risks due to financial market volatility can lead to financial risks for insurance companies."

Fitch forecasted that insurance companies' income will decrease this year due to the impact of the novel coronavirus disease (COVID-19). Fitch said, "In the case of life insurance companies, business losses will increase due to an increase in reserve liabilities caused by stock price declines," and "Non-life insurance will see increased losses due to increased insurance claims in fire and general business sectors and rising costs from intensified competition."

Meanwhile, international credit rating agencies have recently downgraded the credit ratings of insurance companies one after another. Moody's, an international credit rating agency, downgraded Hanwha Life Insurance's Insurance Financial Strength Rating (IFSR) from 'A1' to 'A2' last month. In April, Fitch downgraded Hanwha Life Insurance's IFSR from 'A+' to 'A' and its Long-Term Issuer Default Rating (IDR) from 'A' to 'A-'.