Regulations push Korean insurers to explore credit enhancement measures

Investors are seeking ways of reducing the capital burden on their alternative investments

New capital standards that will be in place in South Korea within two years are causing insurance firms in the country to search for new yield and credit enhancement methods.

As PDI reported, a tighter method of assessing required capital, also known as the K-Insurance Capital Standards, is affecting LPs’ preferences regarding capital structures and vehicle formats.

The first guidelines, drafted by the country’s Financial Supervisory Service in 2018, indicated that insurers’ investments may be subject to greater regulatory scrutiny. The regulator plans to examine the structure of each commitment to alternative assets in order to reveal associated risk factors.

Jiroo Eoh, the head of infrastructure and real asset investments at ABL Life Insurance, a member of China-based Anbang Insurance Group, said that risk charges are the main factor for his team when considering investment decisions across assets.

He told delegates at PERE Asia 2019, a conference organised by PDI’s sister title PERE and held last week in Hong Kong, that if GPs invest in assets with risk charges of 3-6 percent, LPs may require returns of up to 8 percent.

“We really need GPs to actually discuss with us to find a solution to enhance the credit and find ways to deduct the risk-based charges plus enhance the returns,” said Eoh, who added: “We have to invest in debt.”

As part of their debt investment strategy, some insurers are pursuing structured products where they can pick and choose the top tranches with the highest credit ratings.

Doyle Kim, head of overseas real estate investment at Samsung Fire and Marine Insurance, told the conference that his company was among those investors considering direct lending with a structured finance component against single assets.

Kim noted that his peers prefer debt sourced in developed markets, including the US, Europe and Australia, as these markets can offer structured products such as first lien commercial mortgage-backed securities, as well as B and C notes. He said that these products can help investors to ease risk-based capital charges to a degree: “We tend to consider the risk burden first, rather than expected returns and yields.”