Pandemic heightens Korean life insurers' asset risk

The average negative spread widened to 0.85% in H1 2019.

Lower profits and heightened asset risk are on the horizon for Korea’s life insurance industry in the next 12 months as the coronavirus further drags down their investment returns, reports Moody’s Investors Service.

Negative spreads are expected to widen as the COVID-19 pandemic disrupts the already weak economy. This will also keep interest rates low for the next 12-18 months and cause investment returns to decline, according to Moody’s analyst Young Kim.

Average negative spreads for life insurers widened to 0.85% in the first half of 2019 from 0.69% the prior year, 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 12-18 month," adds Kim.

Competition is also likely to remain intense, further straining insurers’ pricing power and underwriting profit.

As a result, profitability is expected to remain weak in 2020 on the back of 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 incentivizing insurers to invest in higher-risk assets,” Kim concluded in a note.