[New Year Interview] "Secondary Financial Sector Vulnerable to Interest Rate Environment... Regulations Should Be Eased and Consumer Benefits Increased"

'Asking the Road Ahead for the Economy and Finance in 2026' Relay Interview
④Seo Jiyong, Professor of Business Administration, Sangmyung University
Secondary Financial Sector Faces Worsening Profitability, Asset Quality, and Funding Environment
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This year, the secondary financial sector is expected to face a triple challenge: declining profitability, deteriorating asset quality, and a worsening funding environment. Regulatory conditions are also likely to become stricter, with the implementation of accountability structures and stronger consumer protection. The burden of costs, such as investments in security infrastructure due to the advancement of artificial intelligence (AI) and rising cyber threats, is also expected to be significant.

Professor Ji-yong Seo of the Department of Business Administration at Sangmyung University is being interviewed by The Asia Business Daily. Photo by Dongju Yoon

Rising Loss Ratios in the Insurance Industry... Interest Rate Environment Also Pressures 'Capital Quality' Management

In a New Year's interview with The Asia Business Daily, Professor Seo Jiyong of the Department of Business Administration at Sangmyung University predicted that the overall business environment for the secondary financial sector this year would be challenging. He said, "The insurance industry is experiencing rising loss ratios across most products, while the credit card industry is facing increased provisions for bad debts and higher funding costs. Savings banks have yet to resolve issues related to real estate project financing (PF), and capital companies are finding it difficult to diversify their businesses due to various regulations."

The insurance industry has seen a steady decline in core business profits in recent years due to structural issues such as low birth rates and an aging population. Although asset management has helped offset some losses, the investment environment is becoming more difficult due to instability in both domestic and global economic and financial conditions. Professor Seo stated, "In the non-life insurance sector, loss ratios for auto insurance and indemnity insurance are significant, but it is difficult to raise premiums in the current environment. In the life insurance sector, regulatory barriers make it hard to expand into long-term care businesses, and competition to sell protection-type insurance to secure contractual service margins (CSM) is intensifying."

Regarding the fifth-generation indemnity insurance set to launch in April, Professor Seo expected some improvement in side effects such as overtreatment. He explained, "Increasing the out-of-pocket ratio for non-severe cases and excluding coverage for manual therapy could help address issues related to overtreatment and medical shopping. However, more specific criteria are needed for differentiating between severe and non-severe cases."

On the basic capital solvency ratio (K-ICS) system, which the financial authorities plan to introduce in 2027, Professor Seo said the degree of burden felt by insurers would vary depending on the interest rate environment. He noted, "Basic capital regulation is a global trend, but in a low-interest environment, an increase in insurance liabilities and a decrease in investment returns could make it more difficult to meet K-ICS requirements."

Card, Capital, and Savings Banks Also Face Difficulty Improving Profitability... Polarization Intensifies

Professor Seo also predicted that it would not be easy for credit finance sectors such as card and capital companies to improve profitability this year, mainly due to the burden of credit finance company bond rates, which are in the 3% range. As of January 20, the interest rate for AA+ three-year credit finance company bonds stood at 3.538%, the highest in about 1 year and 7 months since July 1, 2024 (3.573%). As the likelihood of a base rate cut has decreased, credit finance company bond rates are gradually rising. Professor Seo advised, "Card companies' reliance on credit finance company bonds exceeds 70%, so diversification is necessary. It is important to simultaneously pursue securitization of receivables and the issuance of ESG (environmental, social, and governance) bonds."

Professor Seo also suggested that the financial authorities need to be flexible regarding the inclusion of card loans in the debt service ratio (DSR) regulation. He said, "Even if ordinary consumers are excluded, I think self-employed individuals and those who use card loans for livelihood purposes should be exempt from DSR regulation."

For the capital industry, he predicted polarization between large and small-to-medium-sized companies. Professor Seo said, "With the easing of regulations on telemarketing and rentals, large companies focused on auto finance can expand profitability and reduce real estate concentration risk. However, small and medium-sized companies focused on corporate finance will face various risks, including real estate PF insolvency, increased funding costs, and credit rating downgrades."

He also predicted that the gap between strong and weak savings banks would widen. The resolution of real estate PF insolvency and the financial authorities' policy to encourage mergers and acquisitions (M&A) are expected to lead to increased M&A activity among savings banks. Professor Seo explained, "With the increase in deposit protection limits, savings banks now have more opportunities to raise funds at lower costs, but real estate PF insolvency remains a stumbling block. The authorities are guiding restructuring through M&A among savings banks, and I believe this is the right direction." He added, "However, for savings banks to receive fair value in M&A deals, they must make greater efforts to improve soundness, such as by resolving PF insolvencies."

Professor Ji-Yong Seo of the Department of Business Administration at Sangmyung University is being interviewed by The Asia Business Daily. Photo by Dongju Yoon

Institutional Improvements Needed for the Secondary Financial Sector..."Lower Regulations and Increase Consumer Benefits"

Professor Seo believes that further institutional improvements are needed for the development of the secondary financial sector. In the case of the insurance industry, he advised that support for business diversification, such as long-term care businesses, is necessary. Professor Seo said, "For life insurers, it is difficult for companies other than large ones to pursue long-term care businesses due to regulations on land and building ownership and usage restrictions. It is necessary to consider ways to provide consumer benefits, such as lowering premiums, in exchange for allowing more diverse ancillary businesses for insurers."

He also emphasized the need to ease restrictions on ancillary businesses for capital companies. Allowing capital companies to offer insurance sales comparison and recommendation services, as well as operate insurance agency businesses, would help improve consumer welfare. He positively assessed policies such as allowing large capital companies to engage in telemarketing and easing limits on rental transactions.

For savings banks, he suggested that support is needed to activate MyData services. Currently, among savings banks, only Welcome Savings Bank holds a full MyData license. Professor Seo said, "If savings banks gain competitiveness in MyData services, they will also be able to provide credit evaluation functions. This would lead to the activation of convertible bonds (CB), reducing funding costs for savings banks."

Professor Seo also advised that amendments to the Electronic Financial Transactions Act, including the imposition of punitive fines, are needed to prevent ongoing cyber incidents in the secondary financial sector. He said, "Allowing fines of up to 3% of a financial company's revenue is necessary to some extent. Making related disclosures mandatory is also a good approach."

◆Profile of Professor Seo Jiyong, Department of Business Administration, Sangmyung University

▲Born in 1969 ▲Graduated from Korea University, Department of Sociology ▲MBA from University of Illinois at Urbana-Champaign (UIUC), Ph.D. in Business Administration from Korea University ▲Listed in Marquis Who's Who 2015 Edition ▲Editorial Board Member, Korean Finance Engineering Association ▲Ombudsman, Financial Supervisory Service ▲Member of the Self-Regulation Deliberation Committee, Credit Finance Association ▲President, Korea Credit Card Academic Society

Professor Seo Jiyong of the Department of Business Administration at Sangmyung University is posing after an interview with The Asia Business Daily. Photo by Yoon Dongjoo