Korean insurers have been advised to diversify their foreign exchange hedging strategies as hedging costs soar due to the reversal of interest rates between the US and South Korea.
The foreign exchange hedging costs of domestic insurance companies are estimated to have reached KRW1.80tn ($1.48bn) to KRW2.10tn last year, reported Business Korea quoting a report released by the Korea Insurance Research Institute (KIRI).
The report said insurers' overseas investments surged from KRW26tn at the end of 2009 to KRW141tn last year.
In particular, the costs of foreign exchange hedging have grown as the reversal of interest rates between the US and South Korea started from last year and won-dollar swap points, which are obtained by subtracting the spot exchange rate from the forward exchange rate, went negative.
Currently, insurance companies are making a loss of KRW19.80 per dollar. In fact, an insurance company saw its net profit plunge by as much as 70% year-on-year in the first half of this year, with its forex hedging costs reaching KRW80bn.