Impact of Ultra-Low Interest Rates... Life Insurers' Available-for-Sale Securities Reach Record High of 400 Trillion Won

Asset Growth and Asset Reclassification

Zero Interest Rates and COVID-19 Pandemic

"Asset Management Strategy Must Be Reestablished"

[Asia Economy Reporter Oh Hyung-gil] As insurance companies seek to grow their assets in response to ultra-low interest rates, available-for-sale securities have reached an all-time high. However, concerns are growing that these accounting treatments by insurers may no longer be effective amid the spread of the novel coronavirus disease (COVID-19) and the full onset of the zero interest rate era.

According to the insurance industry on the 13th, available-for-sale securities among domestic life insurers' general account bonds approached 400 trillion won last year. As of November last year, life insurers' available-for-sale securities stood at 397.42 trillion won, marking a 17% increase compared to the same period the previous year. This growth rate is the highest since 2015, when it was 9%.

On the other hand, held-to-maturity securities decreased by about 10%, from 157.48 trillion won the previous year to 141.09 trillion won. The trend of increasing by tens of trillions of won annually since 2014 has reversed.

The non-life insurance sector shows a similar situation. As of November last year, non-life insurers' available-for-sale securities amounted to 140.63 trillion won, a 7% increase from the previous year. However, held-to-maturity bonds increased from 21 trillion won to 27 trillion won.

Insurance companies classify the premiums received from customers into held-to-maturity financial assets, which are securities held until maturity, and available-for-sale financial assets, which are securities that may be sold before maturity, by investing in bonds or stocks.

In financial statements, if financial assets are classified under held-to-maturity accounts, only the book value and interest are reflected. However, if classified under available-for-sale securities, valuation gains or losses due to interest rate fluctuations are added. In a low interest rate environment, reclassifying assets into the available-for-sale account can generate bond valuation gains, resulting in a capital expansion effect.

Thanks to this effect, the total assets of all life insurers increased significantly from 73.9967 trillion won in 2018 to 86.9569 trillion won last year. Non-life insurers' assets also rose from 38.2006 trillion won to 43.6086 trillion won.

As assets increased, the solvency ratio (RBC), an indicator of insurers' soundness, also saw a notable rise. The average RBC of life insurers in the third quarter of last year was 301.2%, up 29.9 percentage points from 271.3% at the end of 2018.

In particular, this asset reclassification was actively carried out mainly by large companies. Samsung Life Insurance's available-for-sale assets increased from 147 trillion won in 2018 to 166 trillion won last year, while held-to-maturity assets showed little change. Hanwha Life Insurance's available-for-sale assets nearly tripled from 28 trillion won to 70 trillion won, but held-to-maturity assets decreased by 36 trillion won. Kyobo Life Insurance also increased its available-for-sale assets from 55 trillion won to 60 trillion won (as of the third quarter of last year).

Since financial authorities restrict insurers from changing financial asset accounts for three years once reclassified, these moves are only temporary interest rate measures. Moreover, with the World Health Organization (WHO) declaring COVID-19 a 'pandemic' and major countries such as the United States consecutively lowering interest rates, warning signs have been raised for asset management strategies.

An insurance industry official said, "If interest rates fall further from the current level, the decline in investment asset yields will increase insurers' burden of negative spread," adding, "It is urgent to establish asset management strategies suitable for the zero interest rate era."

This content was produced with the assistance of AI translation services.