Anna Jiwon Park has been covering the politics at The Korea Times since the summer of 2024, when she joined the press pool for the Office of the President in Korea. Prior to that, she spent about five years reporting extensively on financial markets, regulatory authorities and the financial industry. She joined The Korea Times in 2019 after spending eight years as a broadcast journalist at Arirang TV, Korea’s leading global broadcaster, covering politics, defense and culture.
Insurers' growing exposure to project financing raises concerns over financial soundness
gettyimagesbank
By Anna J. Park
Insurance sector's total exposure reaches W42 tril.
By Anna J. Park
Local insurers are being called on to exercise more careful risk management in project financing due to soaring interest rates.
According to a Korea Insurance Research Institute (KIRI) report, the total amount of local insurance industries' project financing has grown to exceed that of banking industries, triggering concerns over the insurance sector's financial soundness. The global interest rate hikes coupled with signs of depressed real estate markets add pressure on the insurers' shoulders to keep their loan assets in check.
As of the end of last year, local insurance companies' project financing to real estate assets, such as loans associated with infrastructure projects, stood at 42 trillion won ($32.1 billion), steeply surging from 15.7 trillion won at the end of 2016. It accounts for around 30 percent of the insurance companies' aggregated corporate loans of 137.4 trillion won. The portion was only about 20.1 percent back in 2016.
The insurance companies' entire project financing loans are about 13 trillion won more than the aggregate balance of local banks' project financing loans, excluding the Export-Import Bank of Korea.
In terms of insurance companies' entire loan receivables, project financing loans, which had accounted for about 8.3 percent of loan receivables held by insurance companies in 2016, have also increased to 15.8 percent.
The institute thus stressed in the report that the local insurance companies should focus on risk management regarding project financing loans even though the loan default rates have been stably managed at around 5 percent since 2013.
“Although local insurance companies' risks to project financing is limited to project financing loans, the companies are required to take a proactive risk management of the assets, considering soaring interest rates,” the report stressed.
“The rise of interest rate increases construction costs, which in turn puts negative pressure on construction business. Given that the past data showed mortgage loan delinquency rates rose to 0.5 percent from 0.3 percent during 2009 to 2010, while the project financing default rate rose to 8.33 percent in 2010 from the previous year's 4.55 percent, the insurance companies are urged to be well aware of the necessity of active risk management on project financing loans,” the report noted.