South Korean insurance companies are having a headache due to an increase in foreign exchange hedging cost. The cost attributable to the interest rate difference between the United States and South Korea is likely to lead to a significant decline in asset management profit.
The Korea Life Insurance Association announced on June 3 that South Korean life insurance companies’ investment in foreign-currency marketable securities broke the 100 trillion won mark in March this year. The figure is more than three times the same investment of their non-life counterparts. The volume stood at less than 48 trillion won in 2015 yet soared 117 percent in three years.
Such overseas investment expansion is inevitable in that the domestic insurance market is already saturated and the life insurance companies need to diversify their asset portfolios. The problem is that they have to bear foreign exchange hedging costs in order to avoid foreign exchange fluctuation risks. U.S. interest rates topped those of South Korea last year, causing a negative swap point and an increase in foreign exchange hedging cost.
“Our current losses are approximately 17.5 won per U.S. dollar,” one of them explained, adding, “The average annual return of South Korean life insurance companies is about 3 percent to 4 percent and the return falls to the same extent as the increased foreign exchange hedging cost.” He went on to say, “The asset management profits of the companies are predicted to fall by tens of billions of won to hundreds of billions of won this year.” As of March this year, the foreign-currency marketable securities investments of Hanwha Life Insurance, Kyobo Life Insurance, Samsung Life Insurance and NH Life Insurance were 25.62 trillion won, 17.45 trillion won, 16.2 trillion won and 13.1 trillion won, respectively.
Meanwhile, the local financial authorities are merely reiterating the importance of risk management. “With foreign-currency investment on the increase, related foreign exchange hedging is concentrated on short-term derivatives, adding to risks,” the Financial Services Commission said in March, adding, “If necessary, we will tighten our management by requiring more minimum capital and so on.”
The life insurance companies point out that the remarks are an excessive interference with their autonomy in that the purposes of short-term foreign exchange hedging include a quick response to a future decline in the cost as well as cost saving. They also pointed out that the government should relax its capital adequacy regulations at least to some extent with profits already hard to come by in the market.