Korean insurers mull lowering RE investments amid impending regulations

New risk-based capital rules for Korean insurers, set to come into effect by 2022, are prompting investors to revise their real estate allocations for the next few years.

Two large South Korean insurance companies, Kyobo Insurance and KB Insurance, are planning to revise their allocation to real estate vis-à-vis other alternative investments in anticipation of upcoming regulatory changes in South Korea’s insurance industry.

Kyobo Insurance, with 100 trillion won ($89 billion; €78.3 billion) in assets under management, has around 17 trillion won invested in alternative assets.

Of this, 1.1 trillion has been invested in overseas alternatives investments. For 2019, the firm is planning to increase the overseas alternatives exposure to 1.3 trillion won to 1.5 trillion won, Boseok Kim, general manager for alternative investment at the firm, said the PERE Seoul Forum 2018.

However, unlike previous years where a higher percentage of this bucket went to real estate, the insurer is planning to limit its exposure to the asset class and invest more in infrastructure in Europe and Australia instead. Kim said around 600 to 700 billion won would be tentatively invested in real estate next year.

Meanwhile, KB Insurance has around 5 trillion won invested in alternative assets, of which 2 trillion won is in real estate investments in domestic and overseas markets combined.

Yong Won Shin, team head for real estate investment at the insurer, said the firm would lower the real estate portion in its alternative investment portfolio in 2019. Around 200 billion won would be invested in overseas real estate next year, while the current exposure is around 600 to 700 billion.

He also added that rising real estate prices, both domestically and in international markets, have influenced this decision.

South Korea’s financial regulator is set to implement the International Financial Reporting Standards (IFRS 17), a new international accounting standard for insurance contracts; and new capital standards known as K-Insurance Capital Standards (K-ICS).

These regulatory changes will impact domestic insurance companies’ norms for required capital and overall portfolio construction. The IFRS 17, for instance, which will be implemented by 2022, will measure the liabilities of an insurance company at market value instead of book value.

Meanwhile, the K-ICS, whose implementation date is not yet finalised, will impact investors’ decision of what type of alternative assets to invest in and through what structures.

As PERE’s sister publication Private Debt Investor reported: “investing in collective investment entities via commingled funds would now be considered as equity-type investments, and a local watchdog will look through the structure of each commitment to alternative assets to reflect associated risk factors.”