[Insurance Companies' Survival Cliff - Part 1] Chain Bankruptcy Fear Due to 'Zero Interest Rates'... "What Was Inevitable Has Come"

With the unprecedented arrival of the 'zero interest rate' era, insurance companies have reached a crossroads for survival. The worsening business environment has led to sluggish sales, compounded by expanding negative margins and reduced investments, leaving the industry in a dire situation. The prolonged low interest rate trend is fatal for domestic insurers that have grown mainly through savings-type insurance products. Insurance companies are setting new risk management strategies including asset management, actively pursuing cost reductions across overall management such as business expenses, and strengthening management of claim payment ratios and loss ratios. Asia Economy is conducting a series examining insurers' interest rate risks, management crises, and seeking breakthrough solutions for survival.

[Asia Economy Reporter Oh Hyung-gil] "The news that Japan’s insurance companies, ranked second in the world by asset size and once thriving, have gone bankrupt one after another was shocking. Now, we too face a critical crisis where we must seriously consider survival just like those Japanese insurers. The problem is that finding a way to avoid following Japan’s footsteps is not easy."

An executive from a small to medium-sized life insurance company, A, sighed, saying "What was inevitable has come," upon hearing that the Bank of Korea had once again cut the base interest rate. Considering the worsening business environment and the risk of negative margins due to low interest rates, survival is uncertain. Executive A expressed concern, "It is difficult to find a proper exit, and we cannot rule out the possibility of a wave of bankruptcies among domestic insurers similar to Japan’s past."

Insurance companies are being drawn into the vortex of ultra-low interest rates. While their business foundations are deteriorating day by day, the fear that some insurers may go bankrupt due to the low interest rate onslaught has permeated the industry. This is because they have witnessed Japanese insurers going bankrupt one after another in the 1990s due to negative margins caused by long-term low interest rate policies following the bursting of the asset bubble.

In a worsening business environment marked by low birth rates and low growth, the insurance industry is now at a point where survival is a concern after being hit directly by low interest rates. Under a low interest rate regime, there are few suitable investment opportunities to generate profits, and there is no effective countermeasure against deteriorating profitability.

Life insurers sold high-interest products with 6-8% rates until the early 2000s
Concerns over expanding negative margins rise as interest rates turn low
The 1990s Japanese insurers’ chain bankruptcies should serve as a cautionary tale

◆ High-interest fixed products become a boomerang = The biggest cause of the crisis in the domestic insurance industry is attributed to low interest rates. In particular, the large-scale sale of fixed products with annual interest rates above 6% in the past has become a boomerang.

Until the early 2000s, life insurers focused on selling high-interest fixed products guaranteeing 6-8% interest rates. However, due to low interest rates, the yield on managed assets fell, leading to structural deficits.

Korea Credit Rating pointed out, "Hanwha, Dongyang, and Samsung are showing relatively high burdens of negative margins," adding, "Concerns over expanding negative margins are rising due to further interest rate cuts caused by the economic downturn." The yield on insurers’ managed assets plunged sharply from 5.6% in 2010 to 3.5% last year. Considering the 3% range yield that has continued for four years, the negative margin is estimated to be between 1 to 3 percentage points.

A representative from life insurer B said, "Because investment yields are poor, some insurers are currently selling high-quality bonds to defend their performance," expressing concern, "If this interest rate cut affects the long-term bond market, even this will become difficult."

The situation in the non-life insurance sector is not much different. Although the loss ratio of automobile insurance improved due to COVID-19, deficits in automobile insurance and actual loss medical insurance remain large. As the negative impact of COVID-19 on the overall industry prolongs, the sense of crisis deepens.

With such rapidly worsening business conditions, net profits have also sharply declined. In the first quarter of this year, when the COVID-19 pandemic fully unfolded, the net profit of domestic insurers fell 26% compared to the same period last year. Life insurers’ net profit shrank by 38% to 778.2 billion KRW compared to the previous year.

The decline in net profit was linked to increased reserves for variable insurance guarantees due to stock price drops and the minimum guarantee system for variable insurance. Insurance business losses reached 7.9043 trillion KRW due to increased reserve contributions, an increase of over 2 trillion KRW compared to the same period last year.

A representative from non-life insurer C said, "In the case of actual loss medical insurance, the loss ratio is soaring, so the more products are sold, the more losses are incurred," lamenting, "To overcome the performance deterioration, there is no option but to raise premiums, but this is difficult due to financial authorities and negative public opinion."

◆ Avoid following the path of Japanese insurers 20 years ago = The insurance industry is also concerned about shocks that could shake the entire industry, similar to past Japanese insurers.

South Korea and Japan are in many ways similar situations: both are experiencing the world’s fastest aging populations, economic recessions due to the COVID-19 crisis, and base interest rates falling to historic lows. This is why the fear that Japanese insurers’ bankruptcies are "not someone else’s story" is sensed in the insurance industry.

Japanese insurers, facing rapid changes in management environments such as aging populations, the spread of single-person households, changes in insurance demand, and economic recessions, went bankrupt after the bubble economy collapsed in the 1990s and the low interest rate era began.

From Nissan Life in 1997 to Yamato Life in 2008, a total of eight Japanese life insurers went bankrupt over about a decade after the bubble burst. Among them were large companies with asset sizes approaching 3 trillion yen, disproving the "too big to fail" rule.

During the late 1980s when asset price bubbles formed, demand for whole life insurance increased in Japan. Also, with interest rate liberalization, individual pension insurance and variable insurance gained popularity amid a booming stock market. Insurers sold many high-interest insurance products based on high asset growth. However, in the late 1990s, entering a low-growth, low-interest, and aging society, the insurance industry faced a major crisis.

High-interest pension insurance deepened negative margins due to low interest rates, and variable insurance demand disappeared due to stock market downturns. As single-person households increased and incomes fell due to economic recession, people sought cheaper medical insurance instead of expensive life insurance.

Insurers with reduced premium income sought higher profits through alternative investments such as real estate, but faced asset deterioration due to the bubble collapse and eventually closed down.

The vicious cycle of "economic recession → low interest rates → negative margins → alternative investments → asset deterioration" that occurred in Japan’s past is currently unfolding in South Korea.

Some experts note that since premium income is steadily increasing and investment restrictions on overseas investments have been eased, the possibility of bankruptcy is lower than in Japan, but conservative responses are necessary.

Hwang In-chang, a research fellow at the Korea Insurance Research Institute, said, "Insurers need to reassess risk factors by investment asset type and reflect them in stress scenarios to reset asset management and risk management strategies," adding, "Financial authorities should also closely monitor insurers’ concentration in high-risk assets and the possibility of chain reactions if asset deterioration occurs."