Decline Compared to Previous Quarter at the End of September
[Asia Economy Reporter Oh Hyung-gil] The solvency margin ratio (RBC ratio), which indicates the financial soundness of insurance companies, is declining. Although capital expansion efforts such as issuing subordinated bonds are underway, concerns are growing that the RBC ratio decline will accelerate as bond valuation gains decrease with the end of the zero interest rate era.
According to the insurance industry on the 26th, the RBC ratios of major insurers fell one after another at the end of September. Samsung Life Insurance's RBC ratio as of the end of September was 311.3%, down 21.7 percentage points from 333.1% in the previous quarter. Hanwha Life also recorded 193.5%, down 8.5 percentage points from the previous quarter, while Kyobo Life slightly decreased from 285.0% to 283.6%.
Among non-life insurers, Samsung Fire & Marine Insurance's RBC ratio decreased by 7.7 percentage points from 322.4% to 314.7%. Hyundai Marine & Fire Insurance and KB Insurance, which successfully issued subordinated bonds in the first half of the year, managed to raise their RBC ratios.
The RBC ratio is the value obtained by dividing the 'available capital,' which is the capital that can cover losses from various risks of an insurance company, by the 'required capital,' which is the amount of loss if various risks materialize. The Insurance Business Act mandates maintaining it above 100%.
Interest rate hikes are expected to further lower the RBC ratio. When interest rates rise, bond prices fall, and bonds classified as available-for-sale securities see a decrease in valuation gains. The reduced bond valuation gains are directly reflected in capital, leading to a decline in the RBC ratio.
Insurance companies with low RBC ratios or those that have reclassified bonds from held-to-maturity securities to available-for-sale securities face an increased burden of bond valuation losses due to rising interest rates.
Experts point out that during periods of rising interest rates, it is difficult to maintain the RBC ratio solely by increasing retained earnings, so it is necessary to prepare in advance for issuing capital-type securities such as subordinated bonds and hybrid capital securities.
In a report on 'Financial Imbalance Mitigation Policies and the Insurance Industry,' the Korea Insurance Research Institute suggested, “Since financial authorities' and central banks' imbalance mitigation policies can affect capital flows, asset prices, and risks, insurance companies should prepare response strategies in terms of demand for savings-type and investment-type insurance, asset management, and capital management.”
Due to financial imbalance mitigation policies, financial authorities are promoting total household loan management, and the Bank of Korea is also expected to gradually raise the base interest rate with a focus on mitigating financial imbalances.
It is explained that the phenomenon of economic agents pursuing returns is expected to ease, resulting in a slowdown in liquidity growth, easing of fund short-termization, and expansion of downside risks to risky assets. Additionally, it is forecasted that there will be an increase in credit spreads (the interest rate difference between government bonds and corporate bonds) due to rising corporate bond yields caused by decreased preference for risky assets, an increase in loan delinquency rates, and a rise in long-term government bond yields.
However, with the rise in long-term government bond yields and credit spread expansion, issuance conditions for subordinated bonds and hybrid capital securities are deteriorating. The capital recognition ratio for hybrid capital securities is 100%. In contrast, the capital recognition ratio for subordinated bonds is reduced by 20% annually if the remaining maturity is within five years.
Jo Young-hyun, a research fellow at the Korea Insurance Research Institute, urged, "To improve expected returns, it is necessary to reduce the credit risk of managed assets that have expanded in recent years and increase the proportion of long-term government and public bonds. Regarding household loans, the risk of unsecured loans should be carefully examined, and for corporate loans, the repayment ability of vulnerable companies and risks related to overseas alternative investments should also be closely monitored."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
