The liberalization of regulatory burdens on Asia's insurance companies is not a new phenomenon. In fact, over the past few years, the trend has been accelerating, and this is helping to drive an increase in real estate investments.
Industry statistics indicated that at the end of 2013, real estate made up on average just 2 percent of Asian insurers’ portfolios, or around $130 billion. That was made up of 1 percent in China, 1.8 percent in Japan and 2.4 percent in South Korea. By comparison, developed markets typically allocate 4 percent to 6 percent of their assets to real estate.
To address the problem of insurers being underweight in China, South Korea and Taiwan, the respective regulators have been relaxing regulations over the past two years. This includes increasing insurers’ maximum real estate allocation and permitting – as well as streamlining – the procedures in investing in property abroad.
One of the biggest advocates of changing this dynamic has been South Korea's Financial Services Commission (FSC). A former staffer at the FSC told PERE that previously Korean regulation viewed any investment in real estate as speculative activity, and because of that there were a lot of restrictions on investing in any type of real estate.
Yet, due to the trend of low interest rates amid the economic slowdown and ongoing uncertainty in Korea, the FSC decided in late 2015 to ease restrictions on the insurance sector in order to revitalize the insurance business' investment programs.
Initially, they had planned for the amendments to the rules to take force from April 2016, but there have been delays and the current expectation is the bill will come into play at the end of 2016 or at the beginning of 2017.
One of the limitations on overseas indirect investment for insurance companies, for instance, is they are currently required to hold above 150 percent of risk-based capital (RBC) in an effort to reduce investment risk.
And while this should not be too much of a burden, as the average RBC for Korean insurers is over 260 percent currently, the FSC's good work was set to largely become undone in the face of conflicting accounting rules.
The scheduled adoption in Korea of international accounting rules – named IFRS 4 Phase 2 – looked set to cause collateral damage and make it more difficult for Korean insurers to comply with insurance rules as currently written.
However, the industry can rejoice that the FSC has recently taken the initiative to ease a further number of regulations that have been applicable to insurance companies, in order to accommodate the new accounting rules.
The FSC heralded on April 24 that it will move away from a rigid regime of strict pre-screening, to one that gives insurance companies more autonomy over the investment process. As such, insurance companies investing in foreign currency-denominated funds are no longer subject to the mandatory requirement of receiving deliberation by the regulator’s investment committee.
The rationale was to develop the regulatory regime to match it to western standards, said the former regulator.
The move will not go unnoticed by real estate investment managers looking to tap Korean insurance companies for capital commitments, or sellers of real estate as Korean insurers’ investment appetite gathers pace.
According to CBRE research, the total overseas investment volume from Korea was recorded at approximately $7 billion last year, which is about 100 percent growth year on year.
The expectation is that this will continue to grow as overseas investments have more attractive yields than in a fully-priced Korea where there is an oversupply issue. CBRE expects Korean overseas investment activities will go up by 10 percent to 20 percent in 2017, with that growth rate expected to continue for the foreseeable future. Given Korea's regulatory evolution, there is reason to suspect that forecast will be right.