08-Jun-2016 - FITCH: KOREA'S LOW RATES PREVENT REPEAT OF HIGH POLICY PAYMENTS

South Korea's life insurers are unlikely to repeat the mistake of providing high guaranteed rates to gain market share that had saddled them with a decades-old negative-spread burden that lingers today, particularly under the current low-interest-rate environment, Fitch Ratings says in a new report.

The Bank of Korea has not adjusted the base interest rate since cutting it to 1.5% in June 2015, from 1.75% in March 2015. The low-interest-rate environment makes it less likely for insurers to clear their negative-spread burden - which arose in the 1990s when actual investment returns fell below the guaranteed interest rates of 8%-9% they had offered on endowment policies - in the short term, Fitch says.

Persistent low-interest rates affect insurers differently, suppressing one insurer's investment yields, reducing another's funding costs, and improving valuation gains for bond investments.

Meanwhile, a wave of M&As has swept the market in 2015 and 2016 to date as foreign insurers look to expand their business operations into more Asian markets.

Korea's rapidly ageing population is supporting continued business growth in the insurance sector, especially for protection type, pension, and healthcare-related products. Growth is occurring at a modest pace of 5-10% as the market gets more mature and saturated.