Insurance Industry Optimistic on Rate Hike Signals: "Lower Liability Burdens, Improved Profitability"

Bank of Korea Signals Another Rate Hike

Interest Rate Effect Boosts Insurers' Capital Capacity

Aiming for Both Soundness and Profitability

As the Bank of Korea has again hinted at a possible increase in the base interest rate, expectations are growing within the insurance industry for potential benefits from rising rates. Insurance companies typically see higher investment returns and a reduced burden from insurance liabilities when interest rates rise. Accordingly, there is a growing outlook that, if the rate hike cycle gains momentum, both the profitability and capital soundness of insurers will improve simultaneously.

According to the financial sector on June 2, the KRX Insurance Index—which is composed of major domestic life and non-life insurers—rose by approximately 21% over the past month as of the previous day's closing price. This is interpreted as being influenced by the growing outlook for improved profitability and soundness among insurers, following recent signals from the Bank of Korea regarding the potential start of a rate hike cycle. On May 28, the Bank of Korea's Monetary Policy Board included the possibility of a base rate increase in its monetary policy statement. Then, just the day before this article, Bank of Korea Governor Rhee Changyong sent another strong signal by stating, "All indicators are pointing in the same direction." Previously, the global investment bank Goldman Sachs also predicted that the Bank of Korea would raise rates twice within this year.

Insurance companies generate returns by investing the premiums collected from customers in government bonds, corporate bonds, and loan receivables, among other assets. When interest rates rise, insurers are able to reinvest maturing assets into higher-yielding bonds, thus improving their long-term investment returns.

The effects of rising interest rates are also felt on the liability side. Insurers recognize the insurance payments to be made decades in the future as liabilities, discounted to present value. When the interest rate used as a discount rate rises, the present value of future insurance payments decreases, thereby reducing the size of insurance liabilities.

This, in turn, leads to an improvement in capital soundness. The K-Insurance Capital Standard (K-ICS, or KICS) ratio, which is a key indicator of insurers' soundness, is calculated by dividing available capital by required capital. If interest rates rise and insurance liabilities decrease, there is a corresponding increase in available capital. Baeseung Jeon, a research analyst at LS Securities, analyzed, "For large life insurers, a 50 to 100 basis point increase in rates would raise the KICS ratio by about 10 percentage points. Although there may be initial valuation losses on bonds, if the rate hike continues, the average yield on managed assets will rise."

Furthermore, the industry expects that as the burden of insurance liabilities decreases and capital capacity expands in a rate hike cycle, conditions for expanding dividends and investing in new businesses will also improve. An insurance industry official commented, "Insurers are highly sensitive to changes in long-term interest rates. Rising rates reduce the liability burden, improve the KICS ratio, and support improvements in the Contractual Service Margin (CSM) for new contracts, so overall, a generally favorable environment is likely to be created."

This content was produced with the assistance of AI translation services.