Insurance Companies Urged to Strengthen Foreign Exchange Risk Management Amid Currency Fluctuations

A view of the Financial Supervisory Service located in Yeouido, Seoul. [Photo by Yoo Dae-gil]

The Financial Supervisory Service (FSS) has instructed insurance companies to enhance their foreign exchange risk management in response to increased currency volatility. The FSS emphasized that new overseas investments should be executed cautiously, considering soundness and liquidity, and urged restraint in expanding foreign currency positions based on expectations of rising exchange rates.

On June 10, the FSS held an emergency meeting with chief financial officers (CFOs) from 14 insurance companies to convey these directives. This meeting followed a similar gathering with banking sector representatives the previous day, as part of ongoing assessments across various financial sectors.

During the meeting, the FSS stressed that when pursuing new overseas investments, insurance companies must consider not only profitability but also financial soundness, foreign currency liquidity, and the potential for increased market volatility. The FSS cautioned against indiscriminately increasing speculative foreign currency positions based on expectations of further exchange rate hikes.

The FSS also called for a review of foreign exchange hedging management. It noted that if the maturities of hedging derivatives are concentrated at specific points in time, it could lead to increased exchange rate volatility or refinancing burdens, thus advising a more diversified maturity structure. Regarding alternative investments such as overseas private loan funds, the FSS highlighted the need for sufficient loss absorption capacity to prepare for potential losses.

In terms of dollar-denominated insurance sales, the FSS emphasized consumer protection. Although recent sales figures have shown a downward trend, concerns remain regarding the potential for principal losses due to exchange rate fluctuations and the risk of mis-selling. Insurance companies are urged to clearly explain foreign exchange risks and strictly adhere to suitability principles.

The sales volume of dollar-denominated insurance decreased from an average of 233.5 billion won per month in the first quarter of this year to 112.4 billion won in May.

Looking ahead, the FSS plans to assess the foreign exchange risk management status of individual insurance companies in anticipation of potential market volatility. It also intends to evaluate the crisis response capabilities of insurers through stress tests.

* This article has been translated by AI.

SEOYOUNG LEE 2s0@ajunews.com