Insurance Companies Face 'Red Light' as Capital Decreases by Tens of Trillions with 1% Interest Rate Rise

Weight on Additional Interest Rate Hike Within the Year
Efforts to Issue Subordinated Bonds
Interest Expense Burden May Increase

[Asia Economy Reporter Oh Hyung-gil] Concerns are rising that insurance companies' capital could decrease by nearly tens of trillions of won as expectations grow for additional interest rate hikes within the year following last month's rate increase.

Most insurance companies are currently issuing subordinated bonds to raise capital immediately, but this may become a greater burden in the future, making it difficult to serve as a fundamental solution.

According to the insurance industry on the 6th, six major life and non-life insurers (Samsung Life Insurance, Hanwha Life Insurance, Samsung Fire & Marine Insurance, DB Insurance, Hyundai Marine & Fire Insurance, Meritz Fire & Marine Insurance) estimated that a 1% increase in interest rates as of the end of last year would result in a capital reduction of 28 trillion won.

Samsung Life Insurance analyzed that if interest rates increase by 100 basis points (1bp = 0.01%), its capital would decrease by 14.6254 trillion won. The impact of interest rates has grown compared to 2019, when a decrease of 12.2668 trillion won was expected. Hanwha Life Insurance also projected a capital reduction of 4.4782 trillion won with an interest rate hike.

Among non-life insurers, Samsung Fire & Marine Insurance forecasted a capital decrease of 3.1681 trillion won. Following were DB Insurance with 2.3301 trillion won, Hyundai Marine & Fire Insurance with 1.5752 trillion won, and Meritz Fire & Marine Insurance with 1.9223 trillion won reductions.

Insurance companies primarily manage assets by investing in bonds. Under current accounting standards, when interest rates rise, valuation losses on available-for-sale securities (bonds) occur, leading to a decrease in insurers' capital.

Insurance companies that had classified held-to-maturity securities as available-for-sale securities to secure financial soundness by seeking bond valuation gains during the prolonged low-interest-rate environment are now concerned that valuation losses will expand further due to rising interest rates.

In fact, the reduction in insurance companies' capital is becoming a reality. According to the Financial Supervisory Service, as of the first half of the year, total assets of insurance companies reached 1,331.831 trillion won, an increase of 0.8% from the end of last year, but their equity capital decreased by 5.3% to 135.6488 trillion won. This was due to reduced bond valuation gains as market interest rates rose despite better-than-expected net income.

Especially, the new International Financial Reporting Standard (IFRS 17), scheduled to be introduced in 2023, poses a risk of further deterioration in financial soundness. Under IFRS 17, insurance liabilities are measured at fair value rather than cost, requiring insurers to accumulate more capital.

Among these, available-for-sale securities are revalued quarterly at market value and reflected in accounting. Insurers with a high proportion of available-for-sale securities are expected to record more bond valuation losses, leading to a further decline in their Risk-Based Capital (RBC) ratio. It is anticipated that they will need to increase capital expansion beyond current levels.

Researcher Noh Geon-yeop of the Korea Insurance Research Institute stated, "At the end of last year, the operating asset yield of insurers was 3.1%, while the interest rates on recently issued subordinated bonds ranged from 3.3% to 4.8%, resulting in interest expenses higher than operating asset yields," adding, "If issuance of capital securities such as subordinated bonds increases, insurers will bear higher interest expenses due to rising interest rates, which will reduce profits."

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