South Korean life insurers suffered negative spread for the first time in over 70 years in June, data showed, raising concerns about reverse margin that could lead companies to suffer losses as they sell more coverages.

According to data submitted by the Financial Supervisory Service (FSS) to Representative Kim Seong-won of the Liberty Korea Party on Wednesday, life insurance companies have recorded a negative spread of 0.2 percentage point as of the end of June. It was the first time for local life insurers suffer from a minus margin over the industry’s 70-year-old history in Korea.

Negative spread refers to losses created by the difference in the interest rate guaranteed to policy holders and actual yields.

The negative spread comes as Korean life insurance companies’ operating yield has plunged due to a prolonged low interest rate environment and the economic slowdown while they still have to pay higher interests to policyholders with high-interest fixed premium contracts. Industry insiders noted that if life insurers continue to sell products under the current economic conditions, they would face snowballing losses.

FSS data showed that life insurers’ average interest payment to policyholders in the first six months of this year was 4.3 percent while their annual investment yield stood lower at 4.1 percent. It is the first time for life insurers to be exposed to negative spread since the inception of the country’s insurance industry more than 70 years ago. The interest rate margin first fell to the zero percent territory two years ago.

Insurance companies’ investment yields are gains from asset investment. The average interest rate of cumulative premiums is what insurance companies need to pay to policyholders. If insurers’ investment yields are lower than the interest rate, they face negative spread.

Industry insiders noted that the biggest factor affecting negative spread are high-interest fixed premium contracts sold in the past.

FSS data showed that life insurance companies’ cumulative amount of premiums stood at 589.3 trillion won ($504.5 billion) as of the end of June, of which 244.4 trillion won or 41.5 percent was of fixed premium contracts.

The average interest rate of premiums with variable interest was 3.1 percent whereas that of fixed ones an annual average of 6 percent. Data also showed that of fixed premium products, 25.4 percent were of those sold at an annual interest rate of 5 percent or higher, which means that the average interest rate provided by life insurers to policyholders is 7.1 percent, which is more than five times that of one-year fixed deposits at banks.

Life insurance companies’ investment yields, however, have been falling in recent years amid the protracted low interest rate environment after the global financial crisis. The annual yield for 10-year treasury that remained above 5 percent in early 2010 now stands at 1.7 percent.

A chief executive of an insurance company who asked to be unnamed said that insurers’ investment yields could fall to as low as mid-2 percent level next year given the current interest rate trend, which could trigger massive industry restructuring.

Non-life insurance companies including property insurers are also concerned about imminent negative spread. The investment yield of entire insurance industry in the first half of 2015 stood at an annual 5.1 percent, whereas the interest rate to policyholders was 4.6 percent, allowing 0.5 percentage point of gain. However, the spread fell to 0.1 percentage point in the first half of this year.

By Lee Seung-hoon, Kim Myung-hwan, and Lee Eun-joo

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]