Impact of Ultra-Low Interest Rates... Life Insurance Companies' Available-for-Sale Securities Reach Record High of 400 Trillion Won (Comprehensive)

Asset Growth and Asset Reclassification

Zero Interest Rates and the COVID-19 Pandemic

"Asset Management Strategy Must Be Reestablished"

[Asia Economy Reporter Oh Hyung-gil] As insurance companies have started to increase their assets in response to ultra-low interest rates, available-for-sale securities have reached a record high. However, concerns are growing that such accounting treatments by insurance companies may no longer be effective as the spread of the novel coronavirus disease (COVID-19) and the full-scale onset of the zero interest rate era take hold.

According to the insurance industry on the 13th, available-for-sale securities among domestic life insurers' general account bonds last year are approaching 400 trillion won. As of November last year, life insurers' available-for-sale securities amounted to 397.4205 trillion won, a 17% increase compared to the same period the previous year. This growth rate is the highest since 2015, when it recorded 9%.

On the other hand, held-to-maturity securities decreased by about 10%, from 157.4832 trillion won the previous year to 141.0914 trillion won. The trend of increasing by tens of trillions of won annually since 2014 has reversed.

The non-life insurance industry is in a similar situation. As of November last year, non-life insurers' available-for-sale securities stood at 140.6336 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 invest premiums received from customers in bonds or stocks and classify securities into held-to-maturity financial assets, which are held until maturity, and available-for-sale financial assets, which may be sold before maturity.

In financial statements, if financial assets are classified as held-to-maturity, only the book value and interest are reflected, but if classified as 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 significantly increased 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 ratio), an indicator of insurers' soundness, also saw a significant 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 entirely from 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 last year).

Since financial authorities restrict insurance companies from changing financial asset accounts for three years once reclassified, this movement is only a temporary interest rate measure. Moreover, due to the World Health Organization (WHO)'s declaration of the COVID-19 'pandemic,' major countries including the United States are successively lowering interest rates, signaling warnings for asset management strategies.

An insurance industry official said, "If interest rates fall further than now, the decline in operating asset yields will increase the burden of insurers' secondary adverse selection," 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.