Interest Rates Rising... Red Alert on Insurance Companies' Financial Soundness

Subordinated Bond Issuance Costs May Worsen RBC

[Asia Economy Reporter Oh Hyung-gil] As expectations arise that the timing of the base interest rate hike will be brought forward earlier than anticipated, insurance companies are under pressure. Recently, fluctuations in bond market interest rates have kept them busy managing financial soundness. This year, the solvency ratio (RBC ratio), a key indicator of insurance companies' soundness, has been declining for two consecutive quarters.

According to the Financial Supervisory Service, the RBC ratio of insurance companies at the end of the first quarter of this year was 256.0%, down 19.0 percentage points from the previous quarter. It has fallen for two consecutive quarters since recording 283.6% at the end of September last year.

The cause was the rise in bond interest rates. Until now, insurance companies managed their RBC ratios through bond valuation gains and capital increases aligned with low interest rates, but the situation changed as bond interest rates rose from the end of last year. While rising interest rates are favorable for insurers' profitability, they worsen financial soundness.

In the first quarter alone, available capital decreased by 11.1 trillion KRW due to factors such as a decrease in other comprehensive income (accumulated valuation gains on available-for-sale securities) amounting to 11.6 trillion KRW. The 10-year government bond yield, which was 1.71% at the end of last year, rose by more than 30 basis points to 2.06% at the end of March this year.

Insurance companies have attempted to manage soundness by issuing subordinated bonds, but concerns have emerged that rising interest rates could increase interest burdens. Since current insurance liabilities are evaluated on a cost basis, rising interest rates reduce capital without decreasing liabilities, causing the RBC ratio to fall.

If insurance companies expand the issuance of capital securities such as hybrid capital securities and subordinated bonds to defend against RBC ratio declines, they will face higher interest expenses due to rising rates, which will reduce profits.

The RBC ratios of insurance companies are already on a downward trend. The decline is particularly pronounced among life insurers.

The average RBC ratio of life insurers dropped by 24.1% to 273.2%, while non-life insurers' RBC ratio decreased by 9.2% to 234.0%. Among life insurers, companies such as Heungkuk Life, Fubon Hyundai, KDB Life, IBK Pension, and ABL Life saw their RBC ratios fall below 200%.

Among non-life insurers, Hyundai Marine & Fire Insurance, Hanwha General Insurance, DB Insurance, Lotte Insurance, Heungkuk Fire & Marine, NongHyup Property & Casualty Insurance, AXA General Insurance, and MG Insurance all fell below 200%, with MG Insurance approaching the Financial Supervisory Service's recommended threshold of 100% at 108.8%.

The RBC ratio is calculated by dividing available capital by required capital and serves as an indicator of insurance companies' financial soundness. The Insurance Business Act mandates maintaining it above 100%.

A Financial Supervisory Service official stated, "We will strengthen monitoring of domestic and international interest rate fluctuations and the impact of COVID-19 going forward," adding, "If there are concerns about RBC ratio vulnerabilities, we plan to supervise proactively to enhance financial soundness through measures such as encouraging preemptive capital increases."

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