Continued Low Interest Rates Lead to Profitability Decline
Interest-Linked Debt Increases by 6%
[Asia Economy Reporter Oh Hyung-gil] Even as interest rates fall, the scale of interest rate risk arising from the minimum guaranteed interest rate promised to policyholders has exceeded 200 trillion won among the ‘Big 3’ life insurance companies. Although life insurers significantly reduced high-interest savings products, which were identified as the main cause of negative spreads in last year’s low-interest-rate environment, the minimum guaranteed interest rate?set above the asset yield rate?remains at a substantial level.
According to the insurance industry on the 5th, the scale of interest rate-linked liabilities by minimum guaranteed interest rate for the three companies?Samsung Life, Hanwha Life, and Kyobo Life?stood at 205.78 trillion won as of the end of last year. This represents a 6.0% increase from 194.07 trillion won the previous year.
Samsung Life’s interest rate-linked liabilities increased by 5.7% from 103.94 trillion won in 2019 to 109.93 trillion won last year. By interest rate bracket, liabilities with guaranteed rates “over 0% and up to 2%” surged 14.3% year-on-year to 49.25 trillion won, while the “over 3% and up to 4%” bracket grew by 3.2%, and the “over 4%” bracket expanded by 2.8%.
During the same period, Hanwha Life’s liabilities grew 4.9% to 54.36 trillion won. Liabilities in the bracket exceeding 3% alone amounted to 13.50 trillion won, up 1.3% from the previous year. Kyobo Life also saw a sharp increase of 8.2%, from 38.33 trillion won to 41.50 trillion won.
Interest rate-linked insurance products set a minimum guaranteed interest rate to ensure policyholders receive at least the death benefit and surrender value, even when market interest rates fall. The higher of the applied interest rate (the announced rate) and the minimum guaranteed interest rate is applied and returned to the policyholder.
Although the announced interest rate is being lowered to manage interest rate-linked liabilities, if minimum guaranteed liabilities continue to increase, it inevitably negatively impacts profitability. High-interest products sold in the past can become a factor that increases the risk of negative spreads in a low-interest-rate environment.
In particular, last year’s ultra-low interest rates due to COVID-19 led to an unusual boom in savings-type insurance, amplifying the impact of interest rates. According to last year’s life insurers’ premium income status, savings-type insurance increased nearly twice as much as protection-type insurance, which rose by 3.105 trillion won year-on-year.
Life insurers need to raise asset management yields to secure returns above the minimum guaranteed interest rate, but their asset yield rates remain at low levels. Last year, Samsung Life’s asset yield rate was 3.2%, down 0.2 percentage points from the previous year. Hanwha Life maintained 3.5%, but Kyobo Life’s rate fell from 3.9% to 3.7%.
From 2023, under the new international accounting standard IFRS17 and the new solvency regime K-ICS, insurance liabilities must be evaluated at market value, and cash flows related to the minimum guaranteed interest rate must be assessed to set aside reserves.
Ultimately, life insurers are responding by lowering the minimum guaranteed interest rate, but there are concerns that this could also lead to premium increases. A life insurance industry official said, “We are preparing interest rate response measures, such as reflecting asset management performance in the guaranteed rates of new products,” adding, “With recent rises in market interest rates, the burden of interest rate risk is expected to ease somewhat.”
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