A.M. Best has a stable outlook on the South Korea non-life insurance sector, despite operating and regulatory environments that remain challenging for insurance companies.
A new Best’s Market Segment Report, titled, “Market Segment Outlook: South Korea Non-Life,” states that although the overall market is facing increased top-line pressures and tightening regulations, the industry still expects improved underwriting profitability in the coming year from premium hikes announced by South Korea’s regulator in September 2018 and the cooling down of competition in the long-term business line.
In terms of underwriting performance, the industry’s overall combined ratio has faced two offsetting trends in the past four years: a decreasing loss ratio, mainly due to premium hikes in the long-term and automobile insurance lines, and an increasing expense ratio, a result of heightened competition in the long-term insurance line.
Market growth, which had been strong until around 2012, has slowed in recent years from stagnant growth in the industry’s largest business line, long-term insurance, which includes various personal line products such as accident, health, drivers, savings and annuities, while the overall market growth has been at approximately 2% annually, excluding pensions. Slower growth in the second-largest business line, automobile insurance, as large companies began cutting rates in 2017, pushed overall market growth further down to 1.4% year over year in the first half of 2018.
The main source of profits for South Korea’s non-life insurers is investment income, and companies’ investment returns have demonstrated a slightly declining trend over the past five years.
Under current market situations with a lack of strong growth drivers, product innovation can be a key differentiator not just to fight for market share, but also to secure higher profitability. Insurers also are putting a lot of effort into optimising operational processes and strengthening underwriting.
Korean non-life insurers are generally well-capitalised; however, upcoming regulatory changes (i.e, International Financial Reporting Standard 17 [IFRS 17], K-Insurance Capital Standard [K-ICS]), whose detailed guidelines are yet to be confirmed, add uncertainty to the overall insurance industry.
As of June 2018, risk-based capital ratios of most non-life insurers were between 170% and 200%, with a small number of outliers at both ends (the minimum requirement is 100%). To prepare for expected new regulations, insurers have been increasing hybrid and subordinated debt issuances to enhance their capital positions. This trend is expected to continue in the coming years.
Along with careful capital management to align with the changes in the accounting and solvency regimes, the regulator has ramped up scrutiny on risk management, including the adoption of the Own Risk and Solvency Assessment (ORSA) in 2017.