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Wed, February 2, 2022 | 20:28
Non-banks
Low interest rate strains insurers, banks
Posted : 2019-07-31 17:33
Updated : 2019-07-31 19:53
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gettyimagesbank

By Lee Kyung-min

Insurers are coming under growing pressure to boost profits after the Bank of Korea (BOK) lowered its key rate July 18, a measure that has widened the spread between the rate they promised customers earlier and the one under which they borrow from the central bank.

The BOK lowered its key rate to 1.5 percent, a 25 basis points cut from the previous 1.75 percent that had remained unchanged for seven months.

The more "accommodative" measure aims to pre-emptively counter any fallout from the trade dispute with Japan which placed restrictions on three key materials needed by Korean manufacturers of semiconductors and flat screens.

The BOK judged that the damage could be far graver than previously expected given Korea ― the leading global chipmaker ― relies heavily on Japan, which accounts for over 90 percent of the global supply of the three materials.

"Our business environment has deteriorated further," a mid-tier life insurer who refused to be identified said.

"Products we sold about a decade ago ― savings-type, not protective type ― promised an interest rate of up to around 5 percent and the key base rate has slid to 1.5 percent. As the key rate has steadily declined, it is becoming hard for us to find new ways to make profits through a diversified investment portfolio."

Many insurers sold insurance products, the terms of which dictated that the monthly installments not be withdrawn until their maturity, which could be up to 30 years.

If a customer cancels before maturity, the return amount is significantly smaller than the total of the monthly installments paid.

"When we sold the products in the late 2000s, a return rate of around 5 percent was not a far-fetched idea at all, but we are finding it much harder to deliver now," the official said.

The problem will continue for the time being as no silver bullet is in store, according to the Korea Insurance Research Institute (KIRI).

"A substantial insurance policy revision is required to increase profit, but under the current business environment this is not easy to do. Fiscal health of the firm should be also considered," Im Joon-hwan, a senior research fellow at KIRI, said.

The situation is not as severe for commercial banks whose discretion to change lending and borrowing rates is greater than insurers.

However, the net interest margin (NIM), the difference between the rate a bank receives from loans and what it pays for deposits, a measure of profitability, is still a source of concern that cannot be dismissed.

A lowered key rate means a reduced default rate, especially involving low-credit borrowers, and less pressure for banks to increase loan loss reserves.

The reserves are the amount banks have to set aside against a possible customer default. The greater the amount, the more it eats into a bank's profit.

"The lowered key rate will affect our profit margin but performance in other areas will see some positive development," a KB Kookmin Bank official said.

"It could hurt our profit concerning NIM, but it can help us lend at a lower rate. We will increase installment savings products that offer lower interest rates. We expect our NIM in 2019 will fall between 1 and 2 basis points from the year before," the official added.


Emaillkm@koreatimes.co.kr Article ListMore articles by this reporter



 
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