Financial Regulators Should Help Insurance Market Efficiency

Relationship with Financial Authorities and Regulatory Risks

Comprehensive Inspections by the Financial Supervisory Service (FSS) and Internal Control Issues

The FSS rigorously evaluates the internal controls and capital adequacy of financial holding companies to maintain financial market stability.

If the comprehensive inspection results in a management evaluation rating of below grade 2, the financial holding company may face restrictions on incorporating new subsidiaries, as stipulated in Article 10 of the Supervisory Regulations on Financial Holding Companies.

Following the unfair loan scandal involving a relative of its former chairman, Woori Financial Group’s internal control issues have become a focal point, providing grounds for heightened regulatory oversight. This has significantly delayed the timeline for acquiring Tongyang Life Insurance and ABL Life Insurance.

Capital Management Burdens Due to Regulations

The Common Equity Tier 1 (CET1) ratio, a key benchmark for capital adequacy, is a core standard for regulatory oversight. While the financial authorities have set 13% as the guideline, Woori Financial Group’s CET1 ratio stood at 11.95% as of Q3 2024, falling short of the standard.

Acquiring insurance companies would increase Risk-Weighted Assets (RWA) and trigger additional capital deductions under holding company regulations, adding to the burden of capital management. This explains the regulators’ conservative stance on such acquisitions.

Market and Business Impacts of Delayed Approvals

The FSS has postponed announcing the results of its comprehensive inspection and delayed approval decisions, stalling Woori Financial Group’s major business strategies.

The delayed approval not only affects the acquisition of Dongyang Life and ABL Life but also increases the likelihood of delays in Woori Financial’s expansion into other non-banking businesses, potentially undermining its diversification strategy.

Strategic Necessity for Woori Financial Group

Strengthening Non-Banking Businesses

As of Q3 2024, 93.2% of Woori Financial Group’s net income was generated from its banking sector, emphasizing the urgent need to strengthen its non-banking segment.

Compared to competitors like KB Financial (58.0%), Shinhan Financial (76.3%), and Hana Financial (85.6%), Woori Financial’s revenue structure is overly dependent on banking.

The acquisition of Tongyang Life and ABL Life represents a strategic effort to diversify its portfolio and establish a stable revenue base through non-banking ventures.

Enhancing Market Position Through Insurance Acquisitions

Although Woori Financial launched Woori Investment & Securities in May 2023 by merging Woori Savings Bank and FOSS Securities, it has yet to receive final approval. Challenges in non-banking expansion align with the financial authorities’ conservative stance.

The insurance sector, particularly given its growth potential in an aging society, offers significant opportunities. Tongyang Life and ABL Life are considered attractive assets with relatively sound financial structures.

Successful acquisitions would enable Woori Financial to diversify its bank-centered revenue structure and enhance its market competitiveness.

Insurance Market Structure and the Ripple Effects of Acquisition Delays

Overcompetition in the Insurance Market

The domestic insurance market is already overcrowded, with several assets such as KDB Life, MG Insurance, and Lotte Insurance up for sale. Without market consolidation through mergers and acquisitions (M&A), structural inefficiencies may persist.

If the sale of Tongyang Life and ABL Life fails, the insurance market could become more chaotic, leading to excessive competition and deteriorating profitability across the industry.

Market Stability and the Role of Regulatory Authorities

Regulators must actively support M&A activities to enhance market stability and efficiency.

The acquisition of Tongyang Life and ABL Life would contribute not only to Woori Financial but also to the overall restructuring and stabilization of the insurance market.

Prolonged delays in acquisition approvals may lead to declining asset values, reduced capital efficiency, and heightened uncertainty among market participants.

Recommendations and Solutions

Proactive Attitude from Regulatory Authorities

Regulators should guide Woori Financial Group to address its internal control risks while ensuring transparent and reasonable approval standards to expedite the M&A process.

Since the purpose of regulation is to stabilize the financial market, regulatory authorities must adopt a long-term perspective that prioritizes market efficiency over overly cautious approaches.

Strategic Responses from Woori Financial Group

Woori Financial should focus on strengthening its internal control systems and improving capital adequacy to rebuild trust with regulators and eliminate justifications for approval delays.

By actively managing its CET1 ratio and double leverage ratio, Woori Financial can meet regulatory standards while restoring market confidence.

Enhancing Market-Wide Efficiency

A prompt resolution of insurance market assets is crucial for addressing overcompetition and ensuring market stability.

Woori Financial’s acquisition of Tongyang Life and ABL Life could also facilitate the resolution of other assets in the market, contributing to overall efficiency and consolidation.

Regulators must assess acquisition approvals with a broader perspective, focusing on the long-term stability and efficiency of the market as a whole.

Woori Financial Group’s acquisition of Tongyang Life and ABL Life is not merely a matter of business diversification. It represents a critical test of restructuring and stabilizing the domestic insurance market, as well as building trust between regulatory authorities and the market.

Regulators must reaffirm the core objectives of regulation and adopt a forward-thinking and objective approach to ensure long-term market stability and efficiency. Simultaneously, Woori Financial should enhance its internal controls and capital management to secure regulatory trust and strengthen its competitiveness through non-banking sector growth.

Seoul Tribune (c)

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