Non-Life Insurers' Core Business Seen Recovering... Weak Investment Results a Key Variable

Major non-life insurers set to report third-quarter results
Rising interest rates to weigh on short-term earnings and capital adequacy
"Insurance service results will continue to recover"

Ahead of third-quarter earnings announcements by insurers, forecasts indicate that insurance earnings will improve, supported by a recovery in the profitability of indemnity health insurance and auto insurance, while investment earnings will remain weak due to valuation losses on held assets. Some analysts also warn that, for certain non-life insurers, changes in the maturity profile of assets and liabilities could make rising interest rates a burden on capital soundness.

According to financial industry sources on Oct. 21, the combined net income of the three major non-life insurers - Samsung Fire & Marine Insurance, DB Insurance, and Hyundai Marine & Fire Insurance - is expected to be about 1 trillion won, roughly unchanged from the same period last year. Insurance earnings are expected to recover as the introduction of managed benefits for manual therapy reduces the burden of indemnity health insurance claims and the auto insurance loss ratio improves. Investment earnings, by contrast, are expected to remain weak due to valuation losses on held assets amid rising market interest rates and a stock market correction.

When interest rates rise, prices of previously issued bonds fall, potentially resulting in valuation losses on some financial assets held by insurers, such as structured bonds and bond funds. In addition, declines in stock values caused by a market correction and the possibility of valuation losses on alternative investment assets are also factors weighing on earnings. An industry official said, "Rising interest rates are positive over the medium to long term because insurers can reinvest the proceeds from maturing bonds at higher rates. However, it takes time for new income to increase, while valuation losses on held assets can have an impact in the short term."

Some analysts say the benefits of rising interest rates for capital soundness are more limited than in the past. Insurers generally have longer liability durations than asset durations, so when interest rates rise, the value of liabilities falls more sharply, improving their Korea Insurance Capital Standard (K-ICS) ratio. However, some non-life insurers have recently entered an overmatching position, in which asset durations are longer than liability durations, raising the possibility that higher interest rates could instead push down their K-ICS ratios. Seol Yong-jin, an analyst at iM Securities, said, "In the current interest rate environment, major insurers should have no difficulty meeting their target K-ICS ratios. However, the positive impact of rising interest rates on capital appears to have diminished compared with the past."

The basic capital K-ICS ratio regulation, set to take effect in 2027, is also a potential burden. When interest rates rise, the present value of insurance liabilities declines, but surrender values payable to policyholders are not directly affected by interest rate changes, which could increase the shortfall in surrender values. If that shortfall exceeds the amount covered by the surrender value reserve, the excess is classified as supplementary capital rather than basic capital, potentially putting pressure on the basic capital K-ICS ratio.

Meanwhile, the improvement in insurance earnings is expected to continue for the time being. An industry official said, "The costs of long-term treatment for minor-injury patients have been considerable, but we expect excessive spending in this area to gradually decline," adding, "Once the effects begin to fully materialize, the recovery could become more pronounced next quarter."

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