Insurers Wary as Won-Dollar Rate Tops 1500, Fueling FX Loss and Hedging Cost Concerns

With the won-dollar exchange rate fluctuating around the 1500 mark, the insurance industry, which has significant overseas investments, is concerned about rising hedging costs to convert foreign currency assets into dollars and increased pressure on capital adequacy. A sharp rise in the exchange rate erodes the profits generated from insurers' foreign currency assets.

Due to the nature of needing to pay insurance claims over long periods, insurers have consistently invested in stable assets like U.S. Treasuries and high-quality foreign corporate bonds for steady returns. Life insurers, in particular, tend to have a high proportion of investments in overseas bonds to manage their long-term liabilities.

As foreign exchange volatility increases, insurers anticipate higher costs for managing the currency risk associated with their overseas assets. Rising hedging costs can lead to actual investment returns falling below expectations. If a high exchange rate persists, they may consider adjusting the pace of new overseas bond purchases or delaying investment execution.

Similar situations have occurred during previous periods when the exchange rate hovered in the 1400s. Between 2022 and 2023, some insurers responded to increased hedging cost burdens by slowing new overseas bond acquisitions or exploring alternative investment avenues such as domestic corporate bonds and alternative investments alongside U.S. Treasuries, carefully balancing profitability and cost pressures. This time, responses may include enhanced stress testing for various exchange rate scenarios and a re-evaluation of asset-liability currency structures to manage solvency.