Preliminary Business Results of Insurers in Korea for the First Nine Months of 2023
Insurance companies in Korea reported KRW 11.4 trillion in net income for the first nine months of 2023, up 47.2% from the same period of the previous year, according to the preliminary data released by the Financial Supervisory Service (FSS) in December 2023. The improvement was driven mostly by insurance income, which increased sharply in the wake of the transition to new accounting standards (IFRS 17 and IFRS 9).
The implementation of IFRS 17 and IFRS 9 has turned out to give a one-off boost to the performance of insurers in Korea in 2023, with their net income increasing noticeably. Under the new accounting regime, insurance liabilities are measured at market value rather than cost, while gains and losses are recognized over the entire duration of a contract rather than just based on cash flow. These changes are likely to work in favor of insurers who have a higher proportion of short-term protection policies, which tend to generate lower liabilities and can positively impact their earnings.
Higher interest rates had a negative impact on investment income as mark-to-market gains of fixed income securities shrank under the high interest rate environment, which was particularly pronounced among life insurance companies who held a large amount of such assets.
Life insurers saw their net income surge by 49.4% year on year to KRW 4,399.3 billion for the nine-month period thanks to a rise in insurance income. While they reported better underwriting results because of transition effects, life insurers also benefited from an increase in sales of protection insurance policies. However, higher interest rates undermined their investment income significantly.
The non-life insurance sector delivered stronger bottom-line results, with their net income soaring by 45.8% to KRW 7,023.2 billion for the first three quarters of 2023. This robust performance was attributed to transition effects, but it was also backed by an improvement in underwriting gains. Strong motor insurance results supported the growth in underwriting income of non-life insurers, while their investment operations performed weakly due to increased interest rates and a rise in the value of the Korean won.
The total premium volume of insurers grew by 3.8% to KRW 162.3 trillion in the January - September period of 2023. The growth was fueled by the non-life insurance sector. Non-life insurance premiums amounted to KRW 85.9 trillion, up 9.2% from a year earlier. Traditionally, non-life premiums would be smaller than life premiums, but that has not been the case recently due to the continued growth of the non-life sector. General P&C insurance premiums increased by 8.1%, while long-term and motor premiums grew by 3.5%, and 1.5%, respectively. Meanwhile, the non-life industry witnessed a substantially high growth rate of 79% for retirement annuity premiums.
In contrast, life insurance premiums diminished by 1.6% to KRW 76.5 trillion mostly because of sharp decreases in savings and variable life premiums. Savings insurance sales declined notably, with premium income falling by 10%. Retirement annuity and protection-type insurance premiums grew by 15.5% and 4.6%, respectively.
The profitability ratios of the insurance industry diverged in the first nine months of 2023 compared to the same period of the prior year. Its return on assets (ROA) ratio rose by 0.54%p to 1.32%, while its return on equity (ROE) ratio declined by 0.39%p to 9.06% due to an increase in net worth under IFRS 17 in spite of net income growth. Non-life insurers reported higher ratios than life insurers as below:
As of the end of September 2023, insurers reported a decrease in assets compared to nine months earlier. Their total assets declined by 12% to KRW 1,153.4 trillion, which is broken down into KRW 831.4 trillion for life insurance and KRW 322 trillion for non-life insurance. Life insurers continued to dominate insurance industry assets, accounting for 72% of the total.
Over the same nine-month period, the insurance industry saw its total shareholders' equity jumped by 89.1% to KRW 168.1 trillion as of late September 2023. Although assets decreased because of transition effects and a reduction in unrealized gains on the value of securities they hold as investments amid higher interest rates, the value of liabilities contracted more sharply due to the valuation of insurance liabilities at fair value.
This notable increase can be attributed primarily to upward movements in interest rates and, to some extent, to the revised accounting treatments applied to insurance policy acquisition costs. However, it is important to note that insurers may encounter ongoing volatility in their capitalization. The increase in financial assets subject to fair value measurement, coupled with the expanded volatility in interest rates and exchange rates, is likely to result in significant fluctuations in the financial performance and position of the insurance industry during the fourth quarter of 2023.
This volatility could manifest if reserving requirements rise more substantially than asset valuations in the event of declining interest rates or if new regulatory guidelines prompt adjustments in reserve provisions. Consequently, the evolving landscape may introduce challenges to the stability of insurers' capital positions especially considering strengthening regulatory supervision of actuarial assumptions. In May 2023, the regulatory authority introduced guidelines on key actuarial assumptions in order to curb insurers from using overly optimistic assumptions and improve the consistency and comparability of assumptions being used by insurers.
Insurers are therefore encouraged to proactively manage their financial soundness to navigate through potential uncertainties. To this end, it is crucial for insurers to effectively manage asset-liability mismatches and actuarial assumptions as the valuation of insurance liabilities should reflect market-consistent actuarial and economic assumptions.