Korean insurance companies are facing a tighter regulatory environment with new risk-based capital rules, known as K-Insurance Capital Standards (K-ICS), and the full adoption of the International Financial Reporting Standards in 2021.
Insurancers will be less inclined to allocate their assets to commingled funds and make equity commitments due to the tighter assessment methods on required capital.
Investing in collective investment entities via commingled funds will be considered as equity-type investments. A local watchdog will ‘look through’ the structure of each commitment to alternative assets to reflect associated risk factors, according to the first draft of public consultation for K-ICS published by Korea’s Financial Supervisory Service in March.
“Under the current risk-based capital scheme, insurance companies will be charged up to 49 percent of capital burden given [market] risks they are taking when committing to commingled funds for exposures to alternative assets,” the department of insurance compliance examination at the FSS confirmed to sister publication Private Debt Investor.
The FSS has also suggested in the report that managers and their investors can reduce the credit risk burden by providing cash and other qualified collateral.
Korean insurers are still looking to illiquid debt commitments as they pursue higher yielding assets amid the low rate environment. These include Kyobo Life insurance and Hanwha Asset Management, which manages the global alternative investments of Hanwha Life Insurance.
Kyobo Life insurance, with $87.7 billion in total assets, plans to commit $400 million to offshore real estate strategies in 2018 in pursuit of higher yielding debt-type assets, Boseok Kim, general manager at the alternative investment team at the insurance firm, told PDI.
“Specifically, we are looking at bespoke-notes and mezzanine debt for assets in North America as [real estate] equity pricing has been higher than that of Europe or elsewhere,” he said, adding that Kyobo Life has been allocating capital in the region via debt commitments only since 2015.
Hanwha Asset Management, which oversees the global alternative investment activities of the $95.8 billion Hanwha Life Insurance, plans to commit to customised vehicles for offshore private investments, including real estate strategies, Joo Il Kim, vice-president at the liability driven investment team in the alternative investment division at Hanwha Asset Management, told industry participants at the PERE 2017 Seoul Investor Forum held on November 30.
“We plan to identify target regions and sectors first and then find alternative managers to customise vehicles based on our needs for meeting the regulatory requirements,” Kim added.