"Increasing Non-Performing Loans and Decreasing Solvency"...Deterioration of Insurers' Soundness Indicators Amid Rising Interest Rates

Insurance Company RBC (Risk-Based Capital) Ratio Trends (Source: Financial Supervisory Service)

[Asia Economy Reporter Changhwan Lee] This year, as interest rates rose sharply, the number of non-performing loans of insurance companies increased and their solvency margin ratio (RBC) decreased, indicating a deterioration in soundness indicators.

According to the Financial Supervisory Service on the 11th, as of the end of June, the ratio of non-performing loans classified as fixed or below by domestic insurance companies was 0.17%, up 0.04 percentage points (p) from 0.13% at the end of last year.

Fixed or below non-performing loans refer to bad debts with a delinquency period of three months or more among loans. The fixed or below non-performing loan ratio fell from 0.27% in 2018 to 0.17% in 2019, 0.15% in 2020, and 0.13% in 2021, but has been rising again this year.

The increase in non-performing loans is interpreted as being due to the rapid rise in interest rates and the real estate market downturn this year, which caused delinquency rates to rise in corporate loans such as real estate project financing (PF).

The delinquency rate of real estate PF loan receivables of insurance companies rose 0.26%p from 0.07% at the end of last year to 0.33% at the end of June this year.

The amount of PF loans by insurance companies increased significantly from 4.9 trillion won in 2012 to 43.3 trillion won in the first half of this year. As the total loans increased and the real estate market worsened, the delinquency rate also rose.

The interest rate hike also had an adverse effect on the solvency margin of insurance companies. According to the Financial Supervisory Service, as of the end of June, the RBC ratio of insurance companies was 218.8%, a sharp drop of 27.4%p from 246.2% at the end of the previous year. The RBC ratio has been declining for two consecutive years from 274.9% at the end of 2020 to this year.

The RBC ratio quantifies the ability of an insurance company to pay insurance claims promptly when requested by policyholders, and the Insurance Business Act requires it to be maintained above 100%. The decline in the RBC ratio is due to the rise in market interest rates causing the bond prices held by insurance companies to fall, reducing their capital.

However, the Financial Supervisory Service stated that although the RBC ratio has declined, it still significantly exceeds the legal minimum, so there is no major problem with overall soundness. The scale of the increase in non-performing loans is also not yet at a level of concern.

An official from the Financial Supervisory Service said, "Although the soundness indicators of insurance companies have deteriorated due to the rapid rise in interest rates, overall they remain at a good level," and added, "We plan to continuously strengthen soundness supervision to prepare for market volatility."

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