How Insurance Companies Make a Profit

The Core of an Insurer's Revenue Structure
An insurer invests the premiums it receives from customers to generate investment income and later pays out insurance claims.
The key lies in how high a return it can earn by investing the premiums it receives.
An insurer's assets are mainly short- to medium-term in nature, such as bonds (70-80%), but its liabilities carry long-term obligations to pay claims over 20-30 years. This maturity gap determines the impact of interest rate changes.

< Why Rising Interest Rates Benefit Insurers >
When interest rates rise, returns on new investments improve.
Newly received premiums can be invested at higher interest rates, improving profitability.
In addition, when existing bonds mature, reinvestment at higher rates becomes possible, raising the overall return of the portfolio.
Most importantly, the assumed interest rate of insurance contracts stays fixed while investment returns rise, expanding the margin.

< Problems When Interest Rates Fall >
When interest rates fall, returns on new investments decline, and reinvestment risk arises, as high-yield bonds that mature must be reinvested at low rates.
In particular, the burden of high assumed interest rates on insurance products sold during past high-rate periods grows. If investment returns fall below the assumed interest rate, the insurer suffers losses from negative spreads.
< Key Point >
Many people think "falling interest rates → rising bond prices → profits for insurers," but rising bond prices are merely a temporary valuation gain.
What really matters to insurers is a sustained investment return. Since insurance is a long-term business spanning 20-30 years, securing stable, high returns over a long period is the key to survival.
Therefore, when investing in insurance stocks, you should look closely at the current interest rate environment and the outlook for future rates.
You can expect improved profitability in a rising-rate phase and deteriorating profitability in a falling-rate phase.

Samsung Life Insurance, Korea's leading insurer, recorded net income of more than 2 trillion won in 2024, of which investment income from financial products such as bonds accounted for 1.6 trillion won.
This figure alone shows how big a role interest rates play in insurers' earnings.
(You can see that Samsung Life's share price rose from 70,000 won to 110,000 won in 2024)
For non-life insurers, income from fund management also plays an important role, but unlike life insurers, income from their core insurance underwriting business plays a more important role than profits from investment income.
The reason lies in the nature of the products: life insurers' products have much longer maturities than non-life insurers' products, so they can manage funds over the long term and invest more flexibly.