[0.5% Interest Rate Era] Insurers Say "Limit Surpassed"... Record High Negative Margins Trigger 'Emergency'

[Asia Economy Reporter Oh Hyung-gil] Insurance companies have found themselves in a 'double whammy' situation due to the sudden base interest rate cut after just two months.

With low growth and aging population causing sluggish insurance business conditions and increasing insurance operating losses, the low interest rates have also led to poor investment operating profits, resulting in a double burden. As difficulties in asset management deepen and concerns over negative spreads intensify, some pessimistic forecasts even suggest that some insurance companies might shut down.

On the 28th, the Financial Monetary Policy Committee of the Bank of Korea held a regular meeting and lowered the base interest rate for May from the current annual 0.75% to 0.50%, a 0.25 percentage point cut.

As feared, with the interest rate cut, insurance companies are now facing urgent challenges. For insurers whose main investment assets are bonds, the decline in interest rates reduces not only the net asset value but also the yield on new bond investments, causing a drop in the return on managed assets.

In particular, life insurance companies have been hit hard by the negative spread on fixed interest rate products. From the mid-1990s to the early 2000s, life insurers sold high-interest fixed-rate products guaranteeing 6-8% interest.

Insurance companies with poor yields are ultimately lowering the assumed interest rates and raising premiums, which raises concerns about harm to insurance consumers. Since the beginning of this year, amid increased market volatility due to the novel coronavirus disease (COVID-19) pandemic, insurers' net profits have steadily declined.

According to the Financial Supervisory Service, the net profit of all insurance companies in the first quarter fell by 26% compared to the same period last year. Among them, life insurers' net profit sharply dropped by 38% to 778.2 billion won compared to the previous year. Insurance operating losses increased by more than 2 trillion won compared to the same period last year, recording 7.9043 trillion won, partly due to increased guarantee reserve provisions caused by stock price declines.

Non-life insurers also saw their net profit decrease by 4.3% compared to the same period last year. Insurance operating losses increased from 1.0613 trillion won last year to 1.3388 trillion won due to increased long-term insurance business expenses.

Recently, the burden of reserve accumulation for variable insurance guarantees has become significant due to the combined effect of stock price declines. The minimum guarantee system for variable insurance has increased the burden of variable guarantee reserve accumulation, leading to a decrease in net profit.

No Geon-yeop, a research fellow at the Korea Insurance Research Institute, said, "Due to the economic downturn caused by COVID-19 and the Bank of Korea's base interest rate cut, the volatility in financial markets has increased, reducing reserves and increasing guarantee risk," adding, "If the zero interest rate era continues, guarantee reserves will continue to increase due to declines in initial interest rates and long-term average interest rates."