The burden borne by life insurance companies arising from their policy reserves is growing due to falling interest rates.
The burden is mounting in major life insurers that have more fixed-interest products in particular. Interest-rate sensitivity is rapidly increasing in some foreign insurers as well, reported BusinessKorea.According to industry sources, South Korean life insurers’ increase in policy reserves totalled KRW5,635.7bn (44.65bn) at the end of the first quarter of this year, up by KRW1,529.9bn from a year earlier. This was due to key rate cuts in March and May and declines in stock prices.
The Financial Supervisory Service evaluates the adequacy of insurers’ policy reserves twice each year. This is to handle any increase in liabilities before the introduction of IFRS 17 scheduled for 2023. The evaluation reflects various factors such as current market interest rates and mortality rates.
With the insurance liabilities discount rate falling year after year, the burden of insurers with higher interest-rate sensitivity is set to continue to increase.