Will easing of overseas investment limit save insurers?

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By Kim Bo-eun

The life insurance industry has welcomed the passage of revisions to regulations that raise the ceiling for overseas investment, but it is yet to be seen how much this will benefit firms that face increasingly tough circumstances.

The previous regulations stated that insurers could invest up to 30 percent of their assets under management overseas. With revisions passed Wednesday, the cap has been raised to 50 percent. Included are foreign currencies, foreign currency securities and foreign currency derivatives.

Insurers had been calling for the rules to be eased as they face falling profits amid the prolonged low-interest-rate environment here. In the finance sector, only insurers face a limit on overseas investment. Japan scrapped the cap in 2012, as low interest rates persisted.

Major life insurers had already seen their percentage of overseas investment reach the 30 percent limit, with Hanwha investing 28.9 percent abroad and Kyobo 23.6 percent.

"Based on local life insurers' long contract durations, there is a need for long-term investment but they did not have many options here," a Korea Life Insurance Association official said.

"Insurers had faced a limit in making profits amid low interest rates, but now that the cap has been eased, they will have more room to find high-yield investment opportunities abroad."

The development comes as insurers suffer worsening profits amid the low-growth, low-interest-rate environment and mostly saturated Korean market.

Insurers' net profit last year was 5.33 trillion won ― a 26.8 percent fall from earnings in 2018 ― the poorest result since 2010.

Life insurers here face a massive burden as the bulk of their policies guarantee high returns to policyholders while interest rates have continued to fall, resulting in reverse margins.

Insurers' rate of return on investments has tumbled from 5.6 percent in 2010 to 3.9 percent in 2016 and 3.5 percent last year.

The average rate of return for policyholders in the first three quarters of last year was 4.22 percent while 40 percent of the policies currently guarantee a return of over 5 percent.

As a result, life insurers experienced an accumulated 3.3 trillion won in reverse margins in the first three quarters of last year.

The coronavirus crisis has made the situation worse, as insurers have had to suspend face-to-face sales for months following the outbreak.