Reverse Margin of Insurers Estimated at Record High

South Korean insurers’ reverse margin risk has been increased as the Bank of Korea cut the key rate from 0.75 percent to 0.5 percent on May 28. With their return on asset management estimated to fall to about two percent this year, some of them are predicted to undergo a shortage of surplus.

In the first quarter of this year, South Korean insurers’ net profit totaled 1,466.2 billion won, down 26.1 percent from a year ago. Especially, that of life insurance companies dropped 38.4 percent to 778.2 billion won. In view of the recent interest cuts, those companies’ Q2 profitability is likely to further deteriorate.

Major life insurance companies are trying to keep their profits by disposing of receivables. “Listed insurance companies supposed to present business performances each quarter have no choice but to dispose of receivables in order to improve their business performances,” said an industry source, adding, “Although the disposal will lead to more investment profits amid low interest rates, their capabilities to deal with low interest rates will be impaired in the long term due to damaged profit sources.”
 

This year’s negative interest margin of the insurance industry is estimated to hit an all-time high due to the unprecedentedly low interest rates. It is forecast to be at least six trillion won and exceed previous estimates.