'0% Zero Interest Rate' Shock... Insurance Companies' Profitability and Soundness Also Shaken (Comprehensive)

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

Bank of Korea Governor Lee Ju-yeol is striking the gavel at the Monetary Policy Committee meeting held on the 27th at the Bank of Korea headquarters on Sejong-daero, Jung-gu, Seoul. The Bank of Korea decided to keep the base interest rate unchanged at 1.25% during the meeting. / Photo by Moon Ho-nam (Photo courtesy of Bank of Korea)

[Asia Economy Reporters Oh Hyung-gil and Ki Ha-young] "I never imagined interest rates would fall this much. We now have to completely revise all our business plans that were based on predicting 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 in the 0% range' era, the insurance industry is facing a critical situation. The Bank of Korea's big cut (a 0.50% point reduction) has worsened the already deteriorating profitability of the insurance sector, subjecting it to the double burden of negative margins.

For insurance companies that 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 insurance companies, 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 as of the end of November last year, the return on assets (ROA) of domestic life insurers fell by 0.1 percentage points year-on-year to 3.5%. Since the profit rate dropped 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 fallen by 2.4 percentage points, marking an all-time low.

The recent base rate cut is expected to further deteriorate the return on assets. Insurance companies receive premiums from policyholders and invest most of them in bonds. While interest rates have been declining, insurers holding bonds in their available-for-sale accounts have realized gains through bond valuation, 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.

The 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 serious situations such as insurer bankruptcies. Japanese insurers faced a wave of bankruptcies after the mid-1990s due to economic stagnation and low interest rates, which intensified negative margins. Starting with Nissan Life Insurance in 1997, eight life insurers and two non-life insurers went bankrupt in Japan.

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 that asset management yields are around 3.5%, severe 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 Insurance's Insurance Financial Strength Rating (IFSR) of 'A1' and subordinated capital securities credit rating of 'A3'. This reflects concerns over weakened creditworthiness due to profitability deterioration and capital adequacy pressure in a low-interest environment.

Moody's plans to focus on reviewing the expected capital adequacy ratio and capital management plans amid prolonged low interest rates, efforts to mitigate the financial impact of secondary negative margins, management of interest rate risks, and tightening capital adequacy regulations. Additionally, Moody's has started considering a downgrade of Hanwha General Insurance's insurance financial strength rating.

Lee Nam-seok, a researcher at KB Securities, said, "If the low-interest environment continues, the life insurers' negative spread margin is expected to persist. Since the proportion of fixed-rate contracts remains high, reducing negative margins without an interest rate rebound is difficult." He added, "Non-life insurers with a high proportion of interest rate-linked contracts have not yet been significantly impacted by the interest rate decline, but if government bond yields fall to the 0% range, the proportion of contracts approaching the minimum guaranteed interest rate will increase, making margin securing difficult."

An industry insider expressed concern, saying, "The unprecedented zero interest rate is a shock comparable to the period when Japanese insurers experienced a series of bankruptcies 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. When interest rates fall, loan interest rates inevitably decrease, reducing fee income. For credit card companies that have maintained profitability through loan expansions such as card loans, a reduction 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 interest rate cuts.

A credit 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 inevitably decreases."

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