There Are Limits to Just Selling Insurance... Insurers Focus on Scaling Up Their Asset Management Power

Insurance Profit Down, Investment Profit Up
Managing Premium Funds, But... Financial Market Volatility Rises
"Need for Asset Growth Independent of New Contracts"

As the profitability of core insurance operations declines, insurance companies are focusing on expanding their income base through asset management. However, due to increasing volatility in financial markets, including interest rates and exchange rates, operating burdens are rising, such as the depreciation of existing assets and the increase in hedging costs. As a result, there is a growing analysis that, in addition to risk management strategies that respond to market fluctuations, new methods of fundraising are needed that allow insurers to secure stable operating capital without relying solely on insurance product sales.

According to the financial sector on August 28, the insurance profit in the industry for the first half of this year stood at 6.2558 trillion won, down 154 billion won compared to the same period last year. In contrast, investment profits increased by 1.1683 trillion won to 5.4404 trillion won. Regarding this, the Financial Supervisory Service commented, "Improved investment profits and related gains in the first half significantly boosted net income for insurance companies."

Against this backdrop, as insurance profits shrink and investment profits improve, the importance of diversifying income sources through asset management is increasing. Insurers generate returns by investing the funds they acquire from premiums and other sources into assets such as bonds.

However, recently, volatility in interest rates and exchange rates has made operating conditions increasingly complex. In particular, while rising interest rates offer insurers opportunities to add new assets at higher yields, they can also lead to a decline in the value of existing holdings. Furthermore, if interest rates on savings and deposit products rise faster than the declared interest rate on insurance products, this may trigger an increase in the surrender rate of savings insurance, resulting in short-term liquidity burdens.

Exchange rates are also a key variable affecting insurers' asset management. The won-dollar exchange rate recently fell into the 1,300 won range, but in June it threatened to surpass 1,600 won, reflecting high volatility. If the exchange rate climbs back to a high level, the hedging burden for insurers with foreign currency assets will increase. This is because insurance companies use foreign exchange swaps and currency swaps to hedge currency risk, and if contracts mature during periods of high exchange rates and have to be renewed, the refinancing cost may rise. Even if the value of foreign currency assets in won terms increases, the actual investment return may decline if hedging costs rise.

Industry watchers point out that, amid rising financial market volatility, not only investment yields but also the stable securing and management of operating capital are becoming more critical. Currently, insurers primarily operate using funds obtained from insurance product sales. If insurance sales stagnate, the growth of newly acquired operating capital slows. Additionally, because the size and timing of fund inflows and outflows can change depending on insurance payouts and refunds at the time of cancellation, there are limitations in managing operating capital stably.

In response, the possibility of securing separate sources of operating capital is being discussed. One representative measure is the fundraising agreements utilized by major U.S. life insurers. Under such agreements, insurers can determine the amount and maturity of capital to be raised at the time of issuance. Insurers can invest these funds in corporate bonds or private credit to secure additional spread income. Cho Younghyun, research fellow at the Korea Insurance Research Institute, stated, "By using fundraising agreements, insurers can add a wholesale channel targeting institutional investors to the traditional retail funding structure that relies on premium revenue, enabling asset-based growth independent of new policy sales. Adopting new wholesale fundraising channels would allow domestic insurers to strengthen their competitiveness in investment and business operations, and enhance their productive financial capacity."

He added, "For insurers to issue fundraising agreements, there must first be discussion regarding their legal definition, payment priority, and deposit protection under the Insurance Business Act. Financial authorities could consider adopting such a system for insurers with sufficient solvency and risk management capabilities, to strengthen the industry’s asset management foundation and competitiveness."

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