'0% Zero Interest Rate' Shock... Insurance Companies Facing Wave of Bankruptcies Crisis

Impact on Profits from Ultra-Low Interest Rates in Insurance Premium Bond Investments
Major Companies with Many High-Interest Fixed Products Face Negative Margins

Shock Comparable to Japanese Insurer Chain Bankruptcies
Moody's Reviews Credit Downgrade for Hanwha Life and Non-Life Insurance

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] "I never imagined interest rates would fall this much. We now have to completely revise all our management plans that were based on the expectation of low interest rates. It's already difficult to operate due to the novel coronavirus disease (COVID-19), and this just adds insult to injury."

With the advent of the first-ever 'zero interest rate' era below 1%, the insurance industry is facing a crisis. Following the Bank of Korea's big cut (a 0.50 percentage point reduction), the insurance sector, already suffering from deteriorating profitability, is now confronted with the double burden of negative margins.

For insurers who manage finances by investing premiums collected from customers, a hit to growth and profitability has become inevitable. In particular, pessimism is emerging that some life insurers, which have a higher proportion of long-term insurance and high-interest guaranteed products compared to non-life insurers, might even face bankruptcy.

According to the Life Insurance Association and the insurance industry on the 17th, as of the end of November last year, the return on assets (ROA) of domestic life insurers stood at 3.5%, down 0.1 percentage points from the same period the previous year. Since the profit rate fell to the 3% range in 2016, it has struggled to rebound. Over the past decade from 2010 to 2019, the asset management profit rate has dropped by 2.4 percentage points, marking an all-time low.

This base rate cut is expected to further worsen the return on assets. Insurers receive premiums from policyholders and invest most of them in bonds. While interest rates were declining, insurers holding bonds in the available-for-sale account realized valuation gains on these bonds, generating profits.

They have continued to realize such profits by reclassifying assets from held-to-maturity to available-for-sale accounts. However, concerns are growing that the sustainability of profits from bond realizations will be compromised due to zero interest rates.

A bigger problem lies with the high-interest fixed-rate products sold in the past. Large life insurers hold many high-interest fixed-rate products, which could potentially lead to more severe situations such as insurer bankruptcies. In fact, Japan experienced a precedent where eight life insurers and two non-life insurers went bankrupt starting with Nissan Life Insurance in 1997.

According to the Financial Supervisory Service, as of the end of June last year, out of 244.4 trillion KRW in fixed-rate insurance products, 149.8 trillion KRW were high-interest fixed-rate products with rates above 5%. This accounts for over 60% of the total. Considering the asset management yield is around 3.5%, serious negative margins are occurring.

Due to zero interest rates, the market's perception of insurers is also changing. Credit rating agency Moody's announced it has begun reviewing a downgrade of Hanwha Life's Insurance Financial Strength Rating (IFSR) 'A1' and subordinated capital securities credit rating 'A3'. This reflects concerns over credit deterioration due to weakened profitability and capital adequacy pressure in a low-interest-rate environment. Additionally, a downgrade of Hanwha General Insurance's IFSR is also under consideration.

Lee Nam-seok, a researcher at KB Securities, said, "If the low-interest-rate environment continues, the life insurers' negative spread margin is expected to persist. Since the proportion of fixed-rate contracts remains high, it is structurally difficult to reduce negative margins without an interest rate rebound." He added, "Non-life insurers, which have a higher proportion of interest rate-linked contracts, have not yet been significantly impacted by the rate decline. However, if government bond yields fall to the zero percent range, the proportion of contracts approaching the minimum guaranteed interest rate will increase, making margin securing difficult."

An insurance industry official expressed concern, saying, "The unprecedented zero interest rate is a shock comparable to the period when Japanese insurers went bankrupt in succession in the 2000s. It could pose a fundamental threat to the insurance business, and some insurers may even close their doors."

Meanwhile, credit card companies are also facing red flags regarding profitability deterioration. When interest rates fall, loan interest rates inevitably drop, reducing fee income. For card companies that have maintained profitability through loan expansion such as card loans, a decrease in loan interest rates means margins will shrink. However, card companies that raise funds externally by issuing corporate bonds benefit from lower funding costs due to the rate cut.

A card company official said, "When market interest rates fall, card loan interest rates also decrease, leading to reduced income. Under total volume regulation, if loan interest rates fall, interest income itself inevitably decreases."

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