Korea to ease capital reserve rules for insurers’ overseas infrastructure assets

South Korea’s top financial regulator will cut reserve requirements by half for insurance firms’ cross-border infrastructure assets from as early as June, paving the way for domestic insurers to boost overseas alternative investments.

The Financial Supervisory Service (FSS) is working on revising rules on risk coefficients which insurance firms are required to apply to their investments in overseas social overhead capital (SOC) projects when calculating risk-based capital ratios, according to insurance industry sources on March 27.

FSS has recently notified insurance companies of such a regulatory change.

The lower the risk coefficients, the less reserves insurers need to set aside against possible losses from overseas SOC investments.

Specifically, the risk coefficients for equity investments in overseas SOC projects and real estate will be halved to 6% and 4.5%, respectively, from the current 12% and 9%.

The risk coefficients for loans to ungraded overseas SOC projects will be lowered to 3% from 6%, compared with 3% for loans to foreign infrastructure projects with credit ratings of A plus to triple B minus; and 4.5% for loans of below triple B minus.

Insurance firms welcome such a regulatory relaxation, expecting that they can make better returns from cross-border infrastructure investments while extending asset durations by raising exposure to overseas infrastructure.

Institutional investors also pin hopes on infrastructure push by the US government after President Donald Trump pledged to boost infrastructure spending.

“It will provide a catalyst for insurance companies further expanding investments in overseas SOC projects,” said a local insurance industry source. “The recent increase in their investments in overseas SOC projects was a strategic move which took into consideration such a regulatory change.”

Insurance firms have been required to apply twice to four times as much risk coefficients for overseas infrastructure investments as they do for domestic SOC investments which are classified as safe assets. The high capital reserve requirements have kept Korean insurers from aggressively participating in overseas infrastructure deals.

South Korea has been loosening regulations on cross-border investments by insurance companies which are making their foray into riskier investments to bolster investment returns and lengthen asset durations ahead of the introduction of new accounting standard in 2021, which applies market-based valuations on liabilities.