"Insurance Companies Warned Against Excessive Financial Asset Disposal... Concerns Over Declining Interest Income"

[Asia Economy Reporter Oh Hyung-gil] It has been argued that insurance companies' recent disposal of financial assets to boost the return on operating assets in response to changes in accounting standards could reduce future interest income. It was pointed out that life insurers with a low ratio of interest income to operating assets need to pay attention.

On the 7th, the Korea Insurance Research Institute stated this in a report titled "The Phenomenon of Rising Return on Operating Assets of Insurance Companies and Its Implications."

Last year, although the government bond yields fell compared to 2017, the return on operating assets of insurance companies actually increased. The 10-year government bond yield last year was 1.70%, a sharp drop of 0.58 percentage points compared to 2017, while the return on operating assets rose by 0.15 percentage points for life insurance and 0.41 percentage points for non-life insurance.

Researcher Cho Young-hyun of the Korea Insurance Research Institute said, "The return on operating assets does not reflect the valuation gains of bonds held by insurance companies, so it does not rise even if market interest rates fall. The long-term trend of insurance companies' return on operating assets follows the interest rate trend, but short-term changes are closely related to fluctuations in gains from the disposal of financial assets."

Interest income and dividend income, which account for most of the operating asset income (investment business income), change stably, but gains from the disposal of financial assets tend to fluctuate significantly depending on the scale of asset disposals. In fact, in 2018, life insurers saw a sharp increase in gains from the disposal of financial assets due to Samsung Life Insurance's partial sale of its Samsung Electronics shares (about 1.2 trillion KRW).

Over the past three years, the proportion of gains from the disposal of financial assets in operating asset income has shown significant variation among insurance companies. Among life insurers, three companies, and among non-life insurers, four companies had an average proportion exceeding 10% over the past three years.

Life insurers expanded the disposal of financial assets during the process of extending asset duration, and non-life insurers also increased disposals of financial assets while extending asset duration and reducing risky assets.

Researcher Cho explained, "Life insurance companies with a high proportion of gains from the disposal of financial assets in investment business income tended to have significantly increased asset duration over three years, and there were no characteristic changes in credit risk coefficients by type. It appears that the increase in disposals of financial assets was due to the rapid extension of duration in response to the introduction of IFRS17 and K-ICS."

Among non-life insurers, companies with a high proportion of gains from the disposal of financial assets tended to have somewhat lower credit risk coefficients over three years. Changes in asset duration did not show characteristic differences by type but increased significantly compared to life insurers.

Life insurers with a low ratio of interest income to operating assets actively disposed of financial assets, whereas non-life insurers with a high ratio actively disposed of financial assets.

Researcher Cho concluded, "Excessive disposal of financial assets may reduce future interest income, so caution is needed. In the case of life insurance companies, those with a low ratio of interest income to operating assets tend to dispose of many financial assets, so there is a possibility of a decrease in their interest income in the future."

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