Carlyle to enter Korea’s reinsurance market with Korean Re for embattled insurers

The Carlyle Group has joined hands with Korean Re, the largest reinsurer in South Korea, to become the first co-reinsurance providers in a market estimated to grow to 60 trillion won to 100 trillion won ($50 billion to $84 billion) over the next few years.

Korean Re announced on August 4 that it will launch co-reinsurance business together with Carlyle, targeting insurance companies suffering from reverse margins in the extended low interest environment and tightened accounting rules which would force them to bolster capital holdings.

“Together with Carlyle, Korean Re will develop co-reinsurance solutions tailor-made for domestic insurance companies,” said Korean Re spokesman Tae-shik Hong. “We will cooperate in various areas, including designing and structuring products, managing reinsurance assets, taking care of capital requirements and new capital raising.”

Co-reinsurance takes over all types of risk from both assets and liabilities at insurance firms. In comparison, traditional reinsurance provides partial risk coverage for the policy holders, not assuming risks such as a possible interest rate drop which affects risk-based capital ratios.

Their tie-up to enter the new market came after Carlyle acquired 19.9% of Fortitude Group Holdings in 2018 and an additional 76.6% for $2.2 billion in 2020 from American International Group.

In detail, Korean Re will assume the risk from assets and liabilities held by insurers for reinsurance premiums, while Carlyle manages the premium incomes. Korean Re, with a capital of 2.4 trillion won, controls more than 60% of South Korea’s reinsurance market.

The amount of reserves set aside against potential future payouts reached a combined 626.8 trillion won at 23 life insurers in South Korea as of the end of March. Their mark-to-market value is estimated to top 1,000 trillion won.

Assuming 10% of them is transferred to co-reinsurance companies, co-reinsurance contracts will likely reach 60 trillion won to 100 trillion won in value.

Carlyle and Korean Re have done market research and discussed asset management and capital-raising strategies and product development for insurance firms in the past few months.

If Korean Re is required to secure additional capital to meet the solvency margin ratio, Fortitude Group may be able to provide support to Korean Re. But the reinsurer declined to elaborate further.

The regulatory Financial Services Commission has been working on regulations to usher in co-reinsurance business since late last year and is now in the final stages of regulatory revisions.

STRONG NEEDS

To co-reinsurance providers, insurance companies are allowed to transfer all types of risk ranging from the payment of insurance claims to a possible increase in business expenses and an interest rate drop. As a result, insurance firms will be left with a much smaller amount of risk without the need of bolstering their capital and solvency ratios, although they use part of premium incomes for the reinsurance coverage.

Leading life insurers and non-life insurers in South Korea are considering taking out the co-reinsurance policies. Given the strong demand, the country’s co-reinsurance market is likely to make a rapid growth over the next couple of years.

They are bracing for the 2023 adoption of the IFRS 17 accounting standard under which mark-to-market valuations will apply to insurers’ liabilities. In addition, the 2022 introduction of new rules used to determine insurance companies’ ability to pay outstanding claims will likely force them to increase capital holdings.

Under the upcoming regulations, almost half of South Korea’s life insurers are likely to see their solvency margin ratios declining below the regulatory threshold of 100%.

Ultra-low interest rates have taken a heavy toll on their asset management.

More than 70% of life insurance policies sold in Korea carry durations longer than 20 years, which means the bulk of the products guarantee annual yields of at least 3%. With South Korea’s benchmark interest rate held at a record low of 0.5%, the yield on the three-year government bond has tumbled to 0.8% from 13% just before the 1997-98 Asia financial crisis.

Meanwhile, Kewsong Lee, Carlyle’s co-chief executive officer, is set to lead the US private equity group as sole CEO from October. The Korean American has led credit and insurance businesses at Carlyle.

“Carlyle Group is expected to expand reinsurance business and asset management operation by taking advantage of Korean Re’s networks,” said Korean Re’s Hong.

Write to Sang-eun Lucia Lee and Hyun-woo Lim at selee@hankyung.com