"Cheer Up Our Economy, Advancing Korean Finance" Forum
Insurance and Credit Finance Industries Also Need to Prepare for the Era of 3 Highs
"Calls for Risk Management and Resolution of Reverse Discrimination"
[Asia Economy Reporter Minwoo Lee] As domestic and international economic growth is expected to slow this year, an analysis has emerged that insurance companies and specialized credit finance firms need to prepare thoroughly. Insurance companies must devise countermeasures in line with the new accounting standards and focus on creating additional revenue sources. Furthermore, the 'reverse discrimination' regulations against card companies and capital firms need to be resolved to effectively respond to crisis situations.
Complex Uncertainties Approaching... Urgent Need for Risk Management
These views were expressed at the '2023 Cheer Up Our Economy, Advancing Korean Finance' seminar hosted by the office of Yoon Chang-hyun of the People Power Party on the 4th. Cho Young-hyun, head of the Financial System Research Division at the Korea Insurance Research Institute, emphasized that the insurance industry will face complex uncertainties this year. Cho stated, "During an economic recession, insurance demand contracts and cancellations increase, which can slow growth. Additionally, if moral hazard causes insurance payouts to rise, loss ratios will increase, reducing profitability. To maintain growth and profitability, companies need to establish product sales strategies, streamline insurance operations by managing business expenses and insurance payout leakages, and strengthen liquidity and credit risk management."
He also analyzed that liquidity risk must be managed more meticulously. Traditionally, the industry has not faced significant liquidity risk, but due to financial market instability, issues such as ▲negative growth in savings-type insurance ▲reverse 'money moves' caused by high interest rates ▲and conditions linked to a decade-long low interest rate environment could emerge as problems. Especially since bond market instability is expected to continue in the first half of this year, insurance companies that must repay capital securities should proactively establish funding plans. In fact, from the end of December last year through the first half of this year, eight insurance companies face repayment or early redemption (call option) deadlines, totaling 2.1 trillion KRW.
There is also a need to manage inflation risk. Since insurance claims are based on the inflation level at the time of payout rather than at the contract signing, long-term products are more exposed to inflation risk, which can impact profitability. Moreover, inflation-induced economic recession may trigger insurance contract cancellations, and rapid fund shifts to bank deposit and savings products could further increase risks.
Additionally, the introduction of new market-value-based accounting standards such as IFRS17 and K-ICS is considered a major issue to address. Given the uncertainty about the outcomes of these new systems, it is necessary to explore appropriate management strategies by assuming various scenarios.
"Big Tech Needs to Resolve 'Reverse Discrimination' Compared to Financial Sector"
The specialized credit finance industry, including card and capital companies, insists that resolving 'reverse discrimination' is urgent. In the era of the three highs?high interest rates, high inflation, and high exchange rates?they lack deposit-taking functions and are sensitive to economic fluctuations, thus suffering more from recession shocks. They particularly demand equal regulation for postpaid payment services allowed to fintech companies. Park Tae-joon, head of the Credit Finance Research Institute, said, "Although the amendment to the Electronic Financial Transactions Act allows fintech and other electronic financial operators to provide postpaid payment services, which function identically to credit card services by card companies, they are not subject to entry regulations or price regulations designed to protect small businesses." He emphasized, "It is necessary to supplement the Specialized Credit Finance Business Act to implement unified regulations."
Similarly, the capital industry also points out reverse discrimination. Park explained, "Strict real estate lease entry regulations make it difficult to handle real estate leases related to new industry infrastructure such as data centers and electric/hydrogen vehicle charging stations. Among financial sectors, capital companies are the only ones unable to conduct insurance agency operations, limiting opportunities to develop various linked products." He added, "Considering that banks, credit cards, and insurance companies all participate in automobile finance products, these regulations constitute reverse discrimination."
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