[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 expected 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 Sector... Interest Rate Environment Adds Pressure on '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 outlook for the secondary financial sector this year would be challenging. He stated, "In the insurance industry, loss ratios are rising across most products, while in the credit card sector, provisions for bad debts and funding costs are increasing." He added, "Savings banks have yet to resolve bad debts related to real estate project financing (PF), and capital companies are struggling to diversify their businesses due to various regulations."

The insurance sector has experienced 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 explained, "In the non-life insurance sector, loss ratios for auto insurance and indemnity health insurance are significant, yet it is difficult to raise premiums in the current environment." He continued, "For life insurance, regulatory barriers make it hard to expand into long-term care businesses, and competition to secure Contractual Service Margin (CSM) through the sale of protection-type insurance is fierce."

Regarding the fifth-generation indemnity health insurance, set to launch in April, Professor Seo expressed hope that some side effects, such as overtreatment, would be mitigated. "Increasing the co-payment rate for non-severe cases and excluding coverage for manual therapy can help address issues caused by overtreatment and medical shopping," he said. "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 that the burden felt by insurance companies would vary depending on the interest rate environment. "Basic capital regulation is a global trend," he noted, "but in a low-interest environment, increased insurance liabilities and reduced investment returns could make it even harder to meet K-ICS requirements."

Profit Improvement Unlikely for Card, Capital, and Savings Banks... Polarization Intensifies

Professor Seo also predicted that it would be difficult for credit card and capital finance companies to improve profitability this year, mainly due to the burden of credit-specialized financial company bond rates, which are in the 3% range. As of January 20, the interest rate on AA+ rated, three-year credit-specialized financial company bonds stood at 3.538%, the highest in about one year and seven months since July 1, 2024 (3.573%). As the likelihood of a base rate cut diminishes, these bond rates are gradually rising. Professor Seo advised, "Credit card companies' dependence on these bonds exceeds 70%, so diversification is necessary. It is important to pursue both securitization of receivables and the issuance of ESG (Environmental, Social, and Governance) bonds."

Professor Seo pointed out the need for flexibility regarding the inclusion of card loans in the total debt service ratio (DSR) regulation by financial authorities. "Even if we set aside the general public, self-employed individuals and those who rely on card loans for their livelihood should be exempted from DSR regulation," he said.

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

He also projected that the gap between strong and weak savings banks would widen. As the clean-up of real estate PF bad debts and the financial authorities' M&A promotion policy converge, mergers and acquisitions among savings banks are expected to accelerate. "With the increase in deposit protection limits, savings banks now have more opportunities to secure low-cost funding, but unresolved real estate PF bad debts remain a stumbling block," Professor Seo explained. "The authorities are guiding structural adjustments through M&A, which is the right direction." He added, "However, for savings banks to receive fair value in M&A deals, they must work harder to improve asset quality, including resolving bad PF loans."

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 necessary for the development of the secondary financial sector. For the insurance industry, he advised supporting business diversification, such as long-term care businesses. "For life insurers, regulations on land and building ownership and usage restrictions make it difficult for all but the largest companies to pursue long-term care businesses," he said. "It is necessary to consider allowing a wider range of ancillary businesses for insurers, while providing consumer benefits such as lower premiums."

He also emphasized the need to ease restrictions on ancillary businesses for capital finance companies. Allowing capital companies to offer insurance sales comparison and recommendation services, as well as insurance agency businesses, would help improve consumer welfare, he explained. He positively evaluated policies that allow large capital companies to engage in telemarketing and relax limits on rental transactions.

For savings banks, he suggested supporting the activation of MyData services. Currently, only Welcome Savings Bank holds full approval for MyData services among savings banks. "If savings banks become competitive in MyData services, they could also provide credit evaluation functions," Professor Seo said. "This would stimulate the convertible bond (CB) market and reduce funding costs for savings banks."

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

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

▲Born in 1969 ▲Graduated from Korea University, Department of Sociology ▲MBA from the University of Illinois at Urbana-Champaign (UIUC), PhD in Business Administration from Korea University ▲Listed in Marquis Who's Who 2015 Edition ▲Editorial Board Member, Korean Financial Engineering Association ▲Ombudsman, Financial Supervisory Service ▲Member, Self-Regulation Review 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