OREANDA-NEWS. South Korean regulators' forthcoming initiatives in the insurance sector are positive for insurers' capital and risk management capabilities, Fitch Ratings says in a new report.

For instance, the regulator plans to strengthen industry capitalisation and financial strength through the implementation of a tighter regulatory capital regime - the confidence level used to calibrate various insurance risk factors would increase to 99% from 95%. This would push South Korean insurers to devote more attention to risk management.

With the increase in regulatory capital requirement, South Korean insurers are likely to turn to the debt/capital markets for funding if needed. The industry debt leverage ratios for both Korean life and non-life insurers are below 2%, indicating room for more issuance.

The life sector is challenged to continue managing the negative spread burden, as the low-interest-rate environment lingers. This arose from insurers offering high guaranteed rates on endowment products in the 1990s. Life insurers have gradually diluted the effect of that legacy on their portfolios by issuing more policies with low or non-guaranteed benefits. Fitch thinks that the extent of these negative spreads is unlikely to be as severe as that in the 1990s.

Fitch expects Korean life and non-life insurers to continue seeking overseas business expansion opportunities to supplement modest domestic business growth. The emerging markets in Asia, such as Indonesia and China, which have more attractive business potential, are potential investment destinations.