Hedging Costs Snowball
Korean insurers are advised to diversify their foreign exchange hedging strategies as their hedging costs are snowballing due to the reversal of interest rates between the United States and Korea.
The foreign exchange hedging costs of domestic insurance companies are estimated to have reached 1.80 trillion won to 2.10 trillion won (US$1.48 billion to US$1.73 billion) last year, according to a report released by the Korea Insurance Research Institute (KIRI) released on Sept. 1.
The report said insurance companies experienced a raid growth in hedging costs as their overseas investments surged from 26 trillion won (US$21.41 billion) at the end of 2009 to 141 trillion won (US$116.13 billion) last year.
In particular, the costs of foreign exchange hedging have grown further as the reversal of interest rates between the United States and South Korea started from last year and the won-dollar swap points, which are obtained by subtracting the spot exchange rate from the forward exchange rate, went negative. Currently, the industry said insurance companies are making a loss of 19.80 won (US$0.02) per dollar. In fact, an insurance company saw its net profit plunge as much as 70 percent on-year in the first half of this year, with its foreign exchange hedge costs coming to 80 billion won (US$65.89 million).
This is why market experts said it is urgent to diversify foreign exchange hedge strategies. KIRI suggested the diversification of currencies, such as euro, yen and pound, and the diversification of foreign exchange hedge as an alternative.