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South Korea - Life: Request for more relaxation in regulations

Source: Asia Insurance Review | Jul 2015

Life insurers are facing falling demand for insurance as consumers are affected by a prolonged economic recession and falling interest rates. The regulator has been working to assist the industry in looking outside the country with the introduction of a series of measures in 2014, but these are still not enough, says Mr Soo-Chang Lee, Chairman and CEO of the Korea Life Insurance Association (KLIA), as he urges more regulatory relaxation, not only for companies going overseas but for insurers in the country. 
 
2013 had already been a challenging year for Korean life insurers. The ending of a tax benefit for those purchasing life insurance policies had led to a dramatic drop in sales of single-premium saving products. 
   In 2014, the industry had to cope with falling interest rates at home, sluggish economic growth and a ban on telemarketing activities, putting a significant dent on sales.
   Against that backdrop, the Korean life insurance industry grew by a timid 1.9% in terms of premium income in 2014 compared to the previous year. Protection-type products grew by 6%, while sales of saving polices recorded a slight decline of 0.6%.
   The industry performed poorly across a range of other metrics: the number of new contracts dropped 4.1%, while initial premiums edged down 6.4%. The number of new recruits and existing agents dropped 20% and 10% respectively, impacting operating profits, Mr Lee said.
   “Life insurers suffered from low consumer sentiment in the market as consumers became reluctant to buy insurance due to their reduced income affected by a prolonged economic recession,” he said.
 
Happy 2015…or not
And it seems life insurers are not out of the woods yet, with 2015 shaping up to be an equally challenging year – with the recent rate cut by the Bank of Korea, stronger solvency standards expected to be enforced, and an economy failing to lift off. 
   “With the low growth becoming a new norm both home and abroad due to structural problems, the trend does not seem to end for the foreseeable future in the life insurance industry,” Mr Lee said.
   He added that insurers are under too much pressure, being caught between falling interest rates and new prudential regulations. Insurers would benefit from the regulator relaxing its grip over insurance prices in order to improve the financial structure of insurance companies, he said.
   “Technically, insurance prices are not regulated by laws,” he added, by way of explanation.
   “But it is difficult for insurers to determine estimated interest rates or risks in practice without being influenced by hidden or inexplicit regulations.”
 
Far-reaching implications of benchmark interest rate cuts
During the course of 2014, some insurers responded to successive rounds of rate cuts by the Bank of Korea by cutting their minimum guaranteed rates on variable life policies, Mr Lee said. Samsung Life Insurance, for instance, cut its minimum guaranteed rates to 2% from 2.5% on its five-year variable life policies. 
   Each interest rate cut also exacerbates the all-too-familiar issue of negative spread. In the early 2000s, as the country was still reeling from the Asian currency crisis and interest rates shot up in the 5% range, several insurers took it on themselves to offer insurance products guaranteeing interest of 5%, or higher. 
   As the Korean economy gradually found its footing again, sending interest rates down, insurers were left with a legacy of reverse margins on a number of their insurance policies. Today, insurance products guaranteeing interest of 5% or higher still account for 32% of total reserves as of December 2014. 
   Insurers are tackling the issue of negative spread by rebalancing their portfolios mix towards interest-sensitive products, a move that was initiated as early as 2001, Mr Lee said.
 
Overseas expansion: yes, but not with blind faith
Very much like their P&C counterparts, Korean life insurers have increasingly been looking towards overseas markets to mitigate the lukewarm growth prospects offered by their domestic market. Reflecting a view embraced by his counterpart at GIAK, Mr Lee believes that insurers should, however, not put blind faith in the growth potential of overseas markets. 
   “Domestic insurers must carry out an objective and thorough evaluation of costs and benefits before advancing into foreign markets,” he said. Analysing changes in consumer demand, securing the required core capacities, and establishing management strategies were key to success, according to Mr Lee.
 
Regulations need further relaxing
The regulator introduced over the course of 2014 a series of measures that aim to facilitate overseas expansion. 
   Insurers are now able to follow laws of the foreign jurisdiction they are operating when the foreign laws come into conflict with the domestic ones. The approval process is now shorter for subsidiaries acquiring equity in foreign businesses and new overseas subsidiaries are exempt from a business result inspection for a period of up to five years, against two previously. The regulator has also eased restrictions on the use of financial derivatives by insurers. 
   But there is room to do more, according to Mr Lee.
   Regulators should consider extending the exemption period of business results evaluation for new overseas subsidiaries to a period of seven to 10 years.
   Existing restrictions governing asset investment for insurers should also be relaxed, if not removed altogether, he said. Unlike in the US or Japan, Korean insurers can only invest up to 30% of their total assets overseas, drastically limiting their investment choices, Mr Lee said. 
 
Looking at alternative investments
His comments came as the current low-interest rate environment has prompted some changes in the investment strategy of Korean life insurers, pushing them towards higher-risk, higher-yield assets.
   Although bonds remain by far the most preferred asset class, accounting for 56.5% the total investments as of 2014, insurers have been increasing the proportion of other assets such as foreign securities, real estate, and alternative investments in their portfolio. 
   Beneficiary certificates and ETFs are also among the assets not considered in the past that are gaining traction among life insurers, he said.
 
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