Low Interest Rates Take Toll on Insurers' Profits
South Korean life and non-life insurance companies saw their profits fall sharply in the first half of this year due to low interest rates and growing deficits from medical indemnity insurance products.
The net profits of the 24 domestic life insurance companies added up to 2.13 trillion won (US$1.75 billion) in the first half of this year, down 32.4 percent from 3.15 trillion won (US$2.59 billion) a year earlier, according to the Financial Supervisory Service (FSS) on Aug. 26. Operating losses from the insurance business increased due to a rise in maturing savings insurance products. Earnings from the investment business also dropped.
Operating losses from the insurance business totaled 11.83 trillion won (US$9.73 billion), up 454 billion won (US$374 million) from a year ago, as payments to customers of maturing savings insurances grew by 2.50 trillion won (US$2.06 billion). On the other hand, operating profits from investment fell by 667.30 billion won (US$549.72 million) on year to 12.32 trillion won (US$10.15 billion). Non-operating profits also decreased by 320.20 billion won (US$263.76 million), or 12.4 percent, from the same period last year due to the decline in commissions earned from variable insurance products.
The sharp drop in combined net profits was led by the country’s big three life insurers – Samsung Life Insurance Co., Hanwha Life Insurance Co. and Kyobo Life Insurance Co. The three firms saw their net profits fall by 832.80 billion won (US$686.11 million) in the first half. The net profit of Hanwha Life dropped by 61.8 percent on year to 93.40 billion won (US$76.95 million), while that of Samsung Life decreased by 47.7 percent to 756.60 billion won (US$623.43 million). Only Kyobo Life’s net profit grew by 15.8 percent to 481.90 billion won (US$397.08 million).
Market experts said a prolonged period of low interest rates had adversely affected the earnings of life insurance companies. These firms usually create profits by managing assets, for instance, by investing premiums received from policyholders in bonds. However, it is hard for them to make profit these days because the interest rates of government bonds, which are risk-free assets that insurers prefer, remain low.
An official from a life insurance company said, “As interest rates remain low, the return on asset management is expected to decrease for a while.” The premium income also fell as insurers focused more on selling coverage insurance products instead of savings insurance products before the introduction of the new international accounting standard IFRS17.
Non-life insurance companies saw their profits rapidly plummet due to a rapidly growing loss ratio of car insurance products and medical indemnity insurance products. The cumulative car insurance loss ratio of major non-life insurers recorded 84.7 percent to 103.6 percent in June this year. The figure in June is nearly 10 percent higher than the optimum level considering the fact that the industry thinks that optimum loss ratio of car insurance products is 77 percent to 78 percent.
In addition, another main factor of worsening profits is a sharp increase in the loss ratio from surging unpaid medical expenses with “Moon Jae-in care” that has strengthened health insurance coverage. Major non-life insurance firms’ loss ratio from medical indemnity insurance products has already surpassed 100 percent and the medical indemnity insurance loss ratio reached 110 percent to 140 percent in the first half of this year.