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Insurance Regulatory Changes in 2022

The Korean insurance industry is faced with an evolving regulatory landscape in 2022, and it is essential for insurers to keep up with the pace of regulatory developments. In response, insurance companies are embracing themselves for a set of regulatory changes that affect the insurance market. Here is a rundown of the latest regulatory changes:

Compulsory liability insurance for medical device manufacturers or importers

Companies who manufacture or import medical devices are required to have liability insurance that covers losses arising from the malfunctioning of their products. This new mandatory insurance requirement becomes effective in July 2022 when a revision to the Medical Devices Act takes effect. The compulsory liability insurance coverage will help protect medical device manufacturers and importers from financial compensation risks when one of their products turns out defective or causes harm to those who use such devices. Medical equipment and devices are used every day in hospitals and other medical facilities, and lawsuits resulting from faulty devices could bring a huge amount of financial losses to manufacturers or other related parties. With sufficient product liability insurance coverage, they will be protected against lawsuits and claims filed by harmed patients as a result of malfunctioning medical devices.

Improving the structure of insurance products with no or low surrender value

Insurers are required to establish best practice standards to improve the way they calculate the surrender rate when designing insurance products with no or low surrender value. The requirement has been introduced in January 2022 in order to tackle mis-selling practices involving no or low surrender value insurance products and prevent such products from undermining the solvency of insurers. Their sales recently jumped, with the number of new policies soaring from 304,000 in 2016 to 4,435,000 in 2020. An insurer is now mandated to make sure that the adequacy of its surrender rate calculation is validated through the Korea Insurance Development Institute (KIDI) or an external actuarial firm when it develops insurance products with no or low surrender value. In addition, the KIDI is required to support insurers with data sharing and analysis with regard to surrender rates so that they can develop better insurance products.

Sales of Insurance Products with No or Low Surrender Value
* Source: Financial Services Commission

Allowing insurers to engage in the electronic prepayment business

Insurance companies in Korea are allowed to concurrently engage in the electronic prepayment business as of February 2022 following an amendment to the Enforcement Decree of the Insurance Business Act. In addition to their core insurance business operations, they may provide electronic prepayment services through which they can offer points to their customers as rewards for completing certain health care activities. Consumers may use the points they have earned to pay insurance premiums or buy health products.

Raising the monetary cap of health care devices that can be provided by insurers

Since December 2021, the maximum value of health care devices that insurers can provide to their policyholders has been raised to KRW 200,000 from KRW 100,000 under the insurance supervisor’s revised guidelines for the development and distribution of insurance products that offer rewards for healthy behaviors. The guidelines are designed to support the local insurance industry with its efforts to develop and sell new insurance products in step with health care innovations. Insurers are now allowed to provide health care devices of varying value to the policyholders of the same health insurance that rewards healthy behaviors depending on the premium amounts.

Preliminary Business Results of Insurers in Korea for the First Nine Months of 2021

Insurers in Korea recorded the strongest business results in five years for the first nine months of 2021, as they benefited from improving loss ratios, rising interest rates, and robust stock market performance. For the January to September period of the year, they reported KRW 7,630.5 billion in net income, up 37.3% from the same period of the previous year.

Non-life insurance companies saw their net income surge by 62.6% to KRW 3,939 billion for the nine-month period amid decreasing underwriting losses. The improvement in underwriting results reflected a drop in loss ratios of motor and long-term lines of business and the base effect of significant losses from an explosion at a local chemical plant and typhoons in the previous year. Fewer claims arising from a decrease in road traffic and non-urgent hospital visits during the pandemic helped non-life insurers improve their loss ratios. Favorable investment performance also boosted their overall net income results.

Likewise, life insurers delivered better underwriting performance thanks to expense cuts as well as rising stock prices and interest rates, which reduced their burden on guaranteed reserves. Their investment returns marginally declined year on year but remained fairly strong, bringing their collective net income for the nine-month period of 2021 to KRW 3,691.5 billion, up 17.8% from a year earlier.

Net Income
* Source: Financial Supervisory Service

In terms of premium income, insurers in Korea continued to show stable growth, with the total premiums growing by 2.1% to KRW 155.6 trillion for the first three quarters of 2021. Life insurers reported KRW 82.2 trillion in premium income, up 0.9% from a year earlier. The growth was driven by premium income from variable and protection insurance. Variable insurance premiums increased by 9.6% on the back of a buoyant stock market, while protection insurance premiums expanded by 2.4%, with life insurers focusing their marketing efforts on selling protection policies.

Premium Income
* Individual figures may not add up to the total shown due to rounding. * Source: Financial Supervisory Service

Non-life insurers posted a higher premium growth of 3.5%, with their premium income amounting to over KRW 73 trillion. General P&C insurance premiums soared by 8.9%, with long-term and motor premiums rising by 5.3% and 3.8%, respectively. However, retirement annuity premiums declined by 15.2%.

Insurance companies saw their profitability ratios improve on the back of strong net income growth. The return on assets (ROA) ratio of the industry rose by 0.18%p to 0.77%, while the return on equity (ROE) ratio increased by 1.88%p to 7.33%. Non-life insurers reported higher ratios than life insurers as below:

ROA and ROE
* Source: Financial Supervisory Service

Backed by premium income growth, insurers reported a modest increase in assets. As of the end of September 2021, their total assets grew by 1.3% year on year to KRW 1,338.3 trillion, which is broken down into KRW 980.4 trillion for life insurance and KRW 357.9 trillion for non-life insurance. Non-life insurers posted a higher asset growth rate compared to life insurers, but the latter continued to dominate insurance industry assets, accounting for 73.3% of the total.

Total Assets and Shareholders' Equity
* Source: Financial Supervisory Service

Despite strong net income growth, the insurance industry saw its total shareholders' equity diminish by 6.2% to KRW 134.4 trillion as higher interest rates caused insurers to suffer a decline in unrealized gains on the value of securities they hold as investments. The upward movement of interest rates may help insurers improve their profitability in the long term, but it has a downside in the short term. When rates go up, the value of insurers' bond portfolios goes down as existing bonds become less attractive than new bonds that offer relatively higher rates. Although this decrease in value does not affect net income because it is recognized as unrealized gains or losses, it reduces insurers' book value or net worth.

RBC Ratios of the Korean Insurance Industry as of late September 2021

The average risk-based capital (RBC) ratio of insurance firms in Korea fell by 6.4%p quarter on quarter to 254.5% at the end of September 2021 amid market interest rate increases and stock market declines. Despite the decrease, most insurers remained financially robust with their ratios hovering above 150%, which is the practical guideline set by the supervisory authorities. Life insurers saw their average RBC ratio drop by 11.1%p to 261.8% over the same period, but the ratio of non-life insurers rose by 2.3%p to 241.2%.

RBC Ratios of Insurers in Korea (2018-2021)
* Source: Financial Supervisory Service

The total available capital of insurers decreased by 1.4% to KRW 165 trillion due to rising market interest rates and falling stock prices. The yield on ten-year Korea Treasury increased from 2.09% at the end of June 2021 to 2.24% in late September 2021. The Korea Composite Stock Price Index or KOSPI tumbled from 3,296.7 to 3,068.8 over the three month period. Those financial market conditions caused insurers to suffer a reduction in unrealized gains on available for sale securities, which cut into the book value of their shareholders' equity. This decline came in spite of the issuance of subordinated bonds and seasoned equity offering, both of which collectively added KRW 800 billion to the total available capital.

However, insurers saw their required capital increase by 1% to KRW 64.9 trillion at the end of the third quarter of 2021 as the insurance risk amount rose in line with a growth in net written premiums. Their credit risk amount also expanded, with their invested assets growing by around 1% quarter on quarter to KRW 1,062.3 trillion.

The RBC ratios of insurers in Korea have been mostly trending down recently, and solvency capital management has remained one of the biggest challenges for the insurance industry in Korea with the implementation of IFRS 17 scheduled for 2023 along with a new risk-based capital (RBC) regime called the Korean Insurance Capital Standards (K-ICS), which will require strengthened capital adequacy. In response, insurers have been exploring various options to boost their RBC ratios by reducing capital requirements or increasing available capital.

Changes in RBC Ratios of the Korean Insurance Industry
* Source: Financial Supervisory Service

The RBC ratio is a key measure of how financially strong an insurer is, indicating its ability to absorb losses and pay insurance claims to policyholders. Insurers are required by law to maintain the ratio at 100% or above in Korea, and their RBC ratios are regularly monitored by the supervisory authorities. In case of any signs of deterioration in the ratio, the financially weakening insurer will be guided to take proactive actions such as more rigorous stress testing and capital raising.

The Impact of the COVID-19 Pandemic on Motor Insurance

The COVID-19 pandemic has influenced almost every sector of the economy, and the motor insurance market had its share of the impact. In terms of loss ratios, the impact on motor insurance appears to be pretty much favorable. Indeed, insurance companies providing auto insurance coverage benefited from the pandemic because less driving meant fewer accidents and insurance claims.

Between January and September 2021, the motor insurance loss ratio in Korea was 79.4%, down 5.6%p compared to the same period of the previous year. The incidence rate of motor insurance claims has sharply dropped since 2020 when the coronavirus pandemic started in full swing in Korea. The incidence rate of bodily injury liability claims fell from 5.6% in 2019 to 5.1% in 2020 and 5.0% in the first half of 2021. The frequency of property damage liability claims, which had been already going down for many years, declined to 11.8% in 2020 from 13.4% in 2019, and the rate further decreased to 11.3% in the first half of 2021.

Incidence Rates of Motor Insurance Claims
* Sources: Korea Insurance Research Institute, Korea Insurance Development Institute

However, the severity of motor insurance claims has been growing due to an increase in the number of high-priced imported cars and rising medical costs. Insurance payouts for third-party property damage per claim jumped by 9.1% year on year to KRW 1.73 million in 2020, while third-party bodily injury benefits per claim amounted to KRW 4.42 million in 2020, up 11% from a year earlier.

The increase in the severity of third-party property damage claims has been accelerated by rising inflation, pandemic-driven supply chain disruptions, surging sales of expensive imported cars, and high repair costs involving such luxury cars. In 2020, sales of imported cars shot up by 15.9% to 286,685 vehicles, according to the Korea Automobile Importers and Distributors Association (KAIDA). The sales growth reflected pent-up demand as some of the unhappy realities of the pandemic were putting homebound rich Koreans in a buying mood.

Looking ahead, claims frequency will rebound, but inflationary pressure and supply chain issues are bound to keep claims severity high. With eased social distancing measures, more cars are likely to be on the roads compared to the early days of the pandemic, and the frequency of motor claims may return to pre-pandemic levels soon. The trend of rising insurance payouts per claim had long been underway due to moral hazard and dishonest behavior related to third-party bodily injury claims, and the pandemic-induced shortages of car chips are poised to put more upward pressure on claims severity.

Trends of Non-Life Insurance Business Portfolios over the Past Ten Years

Non-life insurers in Korea saw their business portfolio mix change slightly over the past ten years, with the share of long-term insurance increasing. When retirement annuities are excluded, their business portfolios consist of three lines of business, i.e. long-term, motor, and general P&C. A recent study by the Korea Insurance Research Institute shows that between 2010 and 2020, the portion of long-term insurance increased from 60.1% to 64.9% of the total non-life insurance business portfolio, while the share of motor insurance decreased by 3.8%p to 22.7%. There was a 1.0%p decrease in the share of general P&C insurance, which includes fire, marine, guarantee, and casualty.

Trends of Non-Life Insurance Business Portfolios1) (2010-2020)
* Source: Korea Insurance Research Institute

The shifts in the non-life business portfolio mix have been driven by changing insurance demand and insurers' business strategies. There has been growing demand for long-term health and personal accident coverage in step with rising life expectancy. Insurers have also changed their marketing strategies and product offerings in response to the upcoming introduction of IFRS 17, which will reduce the accounting mismatch between assets and liabilities and seek a more market-consistent balance sheet. They focused on marketing long-term protection insurance instead of savings insurance in order to improve their risk profile.

Mid-sized insurers experienced greater changes in their portfolios compared to their larger peers. The share of long-term insurance among mid-sized insurers increased significantly over the ten-year period, while they saw the portion of motor insurance fall sharply. By contrast, larger insurers maintained a relatively stable portfolio mix, with a slightly greater share of motor insurance and modestly larger shares of long-term and general P&C compared to ten years earlier.

It has probably been easier for larger insurers to increase their motor insurance market shares because they are in a better position to provide good-quality claims services based on their strong claims handling resources. Their aggressive strategies to utilize online distribution channels may also have undermined the business of mid-sized insurers.

The share of general P&C insurance has remained mostly stable at 12-13% of the total non-life insurance business excluding retirement annuities, but that is likely to increase going forward on the back of economic development and exposure growth. Changing industrial structure and climate change are also creating a more complex and riskier business landscape, generating greater insurance demand. The insurance industry is thus being increasingly called on to play a bigger role in promoting sustainable economic growth by helping businesses manage and mitigate industrial risks.

  • 1) Excluding retirement annuities