"Insurance Profit and Loss Volatility Expected to Increase in Q2... Investment Income to Support Profitability"

New Actuarial Guidelines in Q2 May Reduce CSM
and Increase Costs for Loss-Making Contracts
Rising Interest Rates to Improve Re-Investment Spread
Hyundai Marine Outlook Remains Negative...
Lotte Insurance Downgraded to BBB+

There are projections that, starting from the second quarter, the volatility of insurance profit and loss for insurance companies may increase due to the implementation of new actuarial guidelines. However, improved yields on investment assets, driven by rising interest rates, are expected to partially offset this effect, which should help maintain profitability at a relatively stable level.

Korea Ratings·KR made this assessment in its report titled "Results of the 2026 First Half Regular Evaluation and Industry Outlook for the Second Half," released on July 7.

Korea Ratings·KR predicted that the earnings volatility of insurance companies would increase from the second quarter. This is because the new actuarial guidelines established by financial authorities are being applied, leading to a reduction in the Contractual Service Margin (CSM) and requiring expenses to be recognized in advance for contracts expected to incur losses. As a result, there is a possibility that profits generated from insurance operations may fluctuate significantly in the short term.

Previously, financial authorities, through the advancement of actuarial supervision, required insurance companies to apply more conservative loss ratios when calculating insurance liabilities for new insurance products and renewable insurance. The standards for business expenses were also strengthened, requiring them to reflect the inflation rate and prohibiting arbitrary shortening of the expense occurrence period.

However, it is expected that the overall profitability of insurance companies will not be significantly affected. While insurance operations may become somewhat unstable, investment profit and loss are anticipated to partially compensate for this. In the short term, rising interest rates may lead to valuation losses and sales losses on FVPL (Financial assets measured at fair value through profit or loss) due to declines in the value of existing financial assets. On the other hand, as reinvestment occurs in high-interest assets, the average yield on assets held by insurance companies—known as the asset yield spread—is expected to improve, leading to a gradual recovery in investment profit and loss. The asset yield spread refers to the average yield obtained from assets managed by the insurance company.

Rising interest rates are also expected to have a positive impact on capital adequacy. Since insurance companies must pay insurance claims over a long period, they are highly sensitive to interest rate changes. When interest rates rise, the present value of future insurance claims decreases, reducing insurance liabilities and thereby improving the capital adequacy ratio (K-ICS·K-ICS). In addition, the financial authorities lowered this year’s recommended K-ICS standard from 150% to 130%, reducing the capital management burden on insurance companies.

Korea Ratings·KR identified the effects of the real-loss insurance system reform as a key variable in the second half of the year. In particular, the agency stated that it would continuously monitor whether changes such as the inclusion of manual therapy in managed benefits would lead to improved long-term insurance loss ratios for non-life insurers.

Meanwhile, Korea Ratings·KR maintained its negative credit outlook for Hyundai Marine & Fire Insurance as before. The agency downgraded Lotte Insurance’s credit rating by one notch from A- to BBB+, citing increased financial uncertainty due to the disapproval of its business improvement plan, and placed it on a watch list for possible further downgrades. Subsequently, after the Financial Services Commission conditionally approved the business improvement plan, the watch status was lifted, but the outlook remains negative.

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