Moody’s Investors Service changed its outlook for the Korean life insurance sector to negative from stable as lower-for-longer interest rates are weighing on profitability and raising asset risk.
“The disruption caused by the coronavirus is adding risk to an already weak economy and will keep interest rates low over the next 12 to 18 months, in turn widening negative spreads for life insurers as investment returns decline,” Moody’s analyst Young Kim said.
Average negative spreads for life insurers widened to 0.85% in the first half of 2019 from 0.69% in 2018 as average investment yields fell to a new low of 3.4%.
“The industry’s decreasing reliance on savings products will eventually improve underwriting gains, but a concurrent fall in premium volumes, together with a weak economy, will strain premium growth over the next 12 to 18 months,” Kim added.
Accordingly, competition will likely remain intense, weakening the industry’s pricing power and underwriting profit.
Moody’s expects profitability will remain weak in 2020, given the low investment returns and high loss ratios on health and medical policies.
The coronavirus outbreak has added downside risk not just in terms of a potential increase in claims, but also by disrupting insurers’ operations and through financial market fluctuations.
Asset risk is also rising as the low interest rates are incentivising insurers to invest in higher-risk assets.
Re-disseminated by The Asian Banker