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Preliminary Business Results of Insurers in Korea for the First Half of 2021

Insurance companies in Korea delivered strong results in terms of net income for the first half of 2021. They reported KRW 5,677 billion in net income for the January to June period of this year, up 49.9% from the same period of the previous year. This higher than expected performance came amid improving loss ratios, rising interest rates, and a vibrant stock market.

Net income of life insurers soared by 51.8% to KRW 3,146.8 billion as underwriting losses narrowed to KRW 10,336.9 billion. Their underwriting performance improved thanks to lower expenses as well as higher stock prices and interest rates, which reduced the burden on guaranteed reserves. However, they saw their investment earnings decline by 5.2% on lower interest income and a decrease in gains on derivatives and foreign currency investments.

Non-life insurers saw their net income jump by 47.5% to KRW 2,530.2 billion due to reduced 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 in the first half of the previous year. Fewer claims arising from lower road traffic and hospital visits during the pandemic helped improve the loss ratios of non-life insurers. Their investment results remained weak, with rising interest rates making it difficult for them to sell their existing bonds.

Net Income
(Source: Financial Supervisory Service)

There was also a one-off factor that boosted dividend income for major insurers, which contributed to overall industry net-income results. Samsung Life Insurance, the largest shareholder of Samsung Electronics, reported a sharp increase in net income for the first six months of the year largely because it received special dividends from the electronics company during the first quarter. Samsung Fire & Marine Insurance, the biggest non-life insurer in Korea, also benefited from the special dividend payments from Samsung Electronics. The total amount of special dividends to the two major insurers was KRW 942 billion.

The Korean insurance industry continued to show stable premium growth, with the total premium income increasing by 3.2% to KRW 105.2 trillion for the first half of 2021. Life insurers reported KRW 55.7 trillion in premium income, up 2.8% from a year earlier. The increase was driven by premium income from variable, savings, and protection insurance. Variable insurance premiums grew by 10.9% on the back of a buoyant stock market, while savings insurance premiums rose by 2.8% amid rising gaps between current interest-crediting rates on savings insurance and interest rates on bank deposits. Protection insurance also increased by 2.8%, but retirement annuity premiums declined by 7.9%.

Premium Income
(Source: Financial Supervisory Service)

Non-life insurers experienced a higher premium growth of 3.6% year on year, with their collective premium income reaching KRW 49.5 trillion. General P&C insurance premiums grew by 9.4%, with motor and long-term premiums rising by 5% and 5.3%, respectively, while there was a 15.8% reduction in retirement annuity premiums.

Insurance companies saw their profitability ratios improve on the back of strong net income growth. The return on assets (ROA) ratio of the industry increased by 0.26%p to 0.86%, while the return on equity (ROE) ratio rose by 2.42%p to 8.14%. Non-life insurers reported higher ratios than life insurers as below:

(Source: Financial Supervisory Service)

Backed by revenue growth, insurers reported a modest increase in assets. As of the end of June 2021, their total assets grew by 0.8% year on year to KRW 1,331.8 trillion, which is broken down into KRW 980.2 trillion for life insurance and KRW 351.7 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 73.6% of the total.

Total Assets and Shareholders' Equity
*Individual figures may not add up to the total shown due to rounding. (Source: Financial Supervisory Service)

The total shareholders' equity of the insurance industry dwindled by 5.3% to KRW 135.6 trillion in spite of strong net income growth. 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 diminishes insurers' book value or net worth.

RBC Ratios of the Korean Insurance Industry as of Late June 2021

Insurance companies in Korea saw their risk-based capital (RBC) ratios rise by 5%p quarter on quarter to 260.9% at the end of June 2021. The increase was driven mostly by the non-life insurance sector, which showed a 14.2%p jump in average RBC ratio. The ratio of life insurers decreased marginally to 272.9%.

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

The total available capital of insurers increased by 2.4% to KRW 167.4 trillion due to net income growth, the issuance of subordinated bonds worth KRW 1.9 trillion, and seasoned equity offering worth KRW 500 billion. On the other hand, their required capital expanded by 0.6% to KRW 64.2 trillion as the insurance risk amount grew in line with an increase in net written premiums. They also saw their credit risk amount rise as their invested assets grew by 1.6% quarter on quarter to KRW 1,052.2 trillion. Their market risk charges increased in the wake of the introduction of capital requirements for short-term currency hedging risks.

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). 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. The supervisory authorities monitor the RBC ratios of insurers, and in case of any signs of deterioration in the ratio, they will guide the financially weakening insurer to take proactive actions such as more rigorous stress testing and capital raising.

Korean Insurance Market Outlook for 2022

Insurance market growth in Korea is expected to slow down from 4.9% in 2021 to 3.2% in 2022, with the life insurance market slowing more sharply. The growth rate will get back on par with the nation’s nominal economic growth rate after recording higher growth in 2020 and 2019. The total premiums are expected to reach KRW 240 trillion in 2022.

As the economy is recovering robustly from the COVID-19 crisis, economic growth momentum will fuel insurance demand, and this will be more prominent in the non-life insurance market, which is expected to see solid premium growth. However, uncertainty still lingers around whether a rising vaccination rate will be sufficient to put the pandemic under control as new and more transmissible COVID-19 variants emerge. Growing household debt also presents another key risk to insurance market growth since it may undermine consumer confidence when interest rates rise.

Korean Insurance Market Growth Rates (2018-2022(F))
(Source: Korea Insurance Research Institute)
Trends of Insurance Premiums (2018-2022(F))
(Source: Korea Insurance Research Institute)

Life Insurance

Life insurance premiums are projected to grow by 1.7% to KRW 126.9 trillion in 2022, representing a noticeable slowdown from a 4.3% growth in 2021. When retirement annuity premiums are excluded, the expected growth rate is further down to 1.5%. Sales of whole life insurance will be weakening as insurers are less motivated to develop new products in the wake of the strengthened supervision of mis-selling practices.

Demand recovery will be led mostly by health insurance products, with the pandemic becoming a driving force behind rising risk awareness and demand for health insurance coverage. This will provide a greater boost to insurers' marketing initiatives to sell protection-type products in the run-up to the implementation of IFRS 17 and K-ICS. Reduced social distancing measures will also help improve sales from face-to-face distribution channels.

In spite of a low interest rate environment, general savings insurance is expected to grow by 2.8% as a large number of savings policies come into maturity in 2022 and some of the policyholders who get maturity benefits are expected to buy new savings insurance. Back in 2012, there was a rush to buy general savings insurance before the tax changes that became effective in 2013, resulting in a year on year growth of 85% in savings insurance premiums in 2012.

Although increasing life expectancy is the primary driver that boosts demand for annuity plans, an increase in life annuity supply is likely to be restrained due to the challenges of longevity risk management and stronger capital requirements under new accounting standards. Insurers expect to see a growth in initial premiums for variable life insurance amid the rising popularity of investment products, but the growth will be limited given the increasing trend of short-term direct investment in the financial market and a growing surrender rate.

Life Insurance Market Outlook by Line of Business
*Others include group life insurance.
**Individual figures may not add up to the total shown due to rounding.
(Source: Korea Insurance Research Institute)

Non-Life Insurance

The non-life insurance market has been demonstrating greater resilience over the last few years, and its premium volume is expected to grow by 4.9% to KRW 113.2 trillion in 2022. The growth will be supported by long-term accident and health insurance, general property and casualty (P&C) insurance, and retirement annuities. When retirement annuities are excluded, premium growth is forecast at 4.4% in 2022, with total premiums of KRW 97.5 trillion.

By line of business, general P&C insurance is projected to grow by 7.5% in 2022, maintaining solid growth momentum thanks to the expansion of the casualty sector. Liability insurance will continue to boost the casualty market, which is expected to expand by 9.4%. Fire insurance premiums are anticipated to grow by 2.3% amid growing demand from households, while marine insurance will likely recover from a contraction in the previous year due to increasing trade flows and shipbuilding orders.

A 5.2% growth is expected for long-term insurance, driven by long-term accident and health insurance. Long-term savings insurance premiums are set to decline further as insurers remain focused on marketing protection products. The motor insurance market is projected to slow down further, growing by 2.1%, due to a decrease in the number of car registrations following the end of a temporary tax cut on purchases of passenger cars. The rise of usage-based insurance and online distribution channels usually offering lower prices is also putting downward pressure on premium income growth per policy.

Non-Life Insurance Market Outlook by Line of Business
*Individual figures may not add up to the total shown due to rounding. (Source: Korea Insurance Research Institute)

Retirement Annuity

The retirement annuity market in Korea is on track to keep growing, as the demand for annuity products is rising amid a growing population of 65 years and older. However, the pace of growth is slowing because the effect of an increase in funding requirements for defined benefit plans is coming to an end. Life insurers are anticipated to see a 2.2 percent growth in retirement annuity in 2022, while retirement annuity premiums of non-life insurers are expected to grow by 8% on the back of premiums from in-force policies.

Improving labor market conditions and the expansion of the individual retirement pension (IRP) sector are upside factors that drive the growth of the overall retirement annuity market. There are some downside factors for insurers, on the other hand, such as intensifying competition against other financial sectors. Given that a large chunk of premium contributions are made at the end of the year, there is a higher level of uncertainty as to growth projections for the retirement annuity market.

Retirement Annuity Premiums (2016-2022(F))
(Source: Korea Insurance Research Institute)

Overview of the Commercial Insurance Market in Korea

The commercial insurance market in Korea has continued to grow in terms of both new policy counts and premium income. In 2020, commercial insurance premiums jumped by 11.5% year on year to KRW 4,087 billion, with all lines of commercial insurance except for fire insurance posting double-digit growth rates. The number of new policies increased by 1.2% to around 5.3 million in 2020.

Commercial insurance refers to general property & casualty (P&C) insurance other than household general P&C insurance and motor insurance. It is designed to provide coverage for businesses against risks that may arise in relation to their business operations and threaten their financial stability. Unlike personal lines of insurance, commercial insurance is corporate insurance that is structured and negotiated to meet the needs of specific corporations or industries. It provides much higher limits of coverage than personal insurance because the sum insured is typically much higher.

Trends of Commercial Insurance Market Size (2018-2020)
(Source: Korea Insurance Development Institute)

In 2020, commercial insurance accounted for 42.6% of the total general P&C insurance premiums, with personal insurance making up the rest 57.4%. Its share has continuously increased from 40.8% in 2018 and 41.2% in 2019. When it comes to new policy counts, commercial insurance took up only 16.7%, but the share has also been on the rise.

There are five major lines of corporate insurance business: fire, marine, engineering, liability and comprehensive insurance. In 2020, comprehensive insurance premiums grew by 10.9% to KRW 1,671.3 billion. Comprehensive insurance took up the largest portion of the market, accounting for 40.9% of the total premium income, followed by liability (29.7%), marine (17.1%), engineering (7.3%), and fire (5%). Marine insurance recorded the highest year-on-year growth rate of 17.1%, with premiums amounting to KRW 699.8 billion in 2020.

Commercial Insurance Market Size by Line of Business
*Individual figures may not add up to the total shown due to rounding. (Source: Korea Insurance Development Institute)
Breakdown of General P&C Insurance Premiums in 2020
Breakdown of Commercial Insurance Premiums in 2020

(Source: Korea Insurance Development Institute)

The share of fire insurance continued to drop, with the fire coverage being increasingly packaged into comprehensive insurance. Marine insurance saw its share increase to 17.1% in 2020 from 16.3% in 2019, due partly to a hike in war risk premium. The share of liability insurance kept increasing to 29.7% amid rising awareness of liability coverage and the government's initiatives to introduce new compulsory insurance plans to reinforce protection of accident victims against the costs of recovering from an accident that someone else has caused. In particular, there has been an uptick in demand recently due to increasing incidences of man-made disasters and growing interest in insurance covering the commercial sector against various business risks, such as negligence claims and cyber breaches.

The incurred loss ratio of commercial insurance soared to 95.7% in 2020 mostly due to unusually large-loss events including a fire at a local chemical plant. By line of business, comprehensive insurance saw its loss ratio surge to 127.1%, and the loss ratio of fire insurance stood at 83.1%, which was the second highest followed by marine at 74.9%, liability at 74.8%, and engineering at 62.4%.

The Growth of the Digital Insurance Market in Korea

Insurance companies around the globe are taking digitalization seriously, and the Korean market is no exception. Several large technology platforms in Korea are working to enter the insurance industry, while traditional insurance companies are increasingly keen to seek digital opportunities to enhance their competitiveness and improve overall customer experience.

The presence of tech companies in the insurance market has been rising. In June 2021, Kakao, the biggest messaging platform in Korea, obtained preliminary approval for a digital non-life insurance operation from the Financial Services Commission (FSC). Naver, the nation's internet giant, established NF Insurance Service as an affiliate of its financial services subsidiary in July 2020 to provide a platform that offers insurance products of existing insurers and enables insurance price comparison. Toss, a mobile financial service application, launched a general agency platform in November 2018 to tap into the insurance market. These tech companies are in a competitive position to sell insurance by leveraging their huge subscriber bases. They would mostly target to sell short-term and small-amount policies, as that market segment has lower barriers to entry.

The expansion of the digital insurance market in Korea is driven in some part by the government's initiative to reform the regulatory framework. Since April 2019, the FSC has put in place the financial regulatory sandbox, a program aimed at designing appropriate financial regulations in a way that allows businesses to introduce innovative products and services and expands customer access to them. The entry of various platform operators into the insurance market is likely to encourage market competition, leading to greater consumer choice of insurance products and services.

Healthcare is becoming a critical aspect of insurers' digitalization. Many insurance companies in Korea have been entering the healthcare service market through digital platforms since the government allowed insurers to provide non-medical healthcare services to the general public, such as personal health data management and fitness assistance services. Insurers will be able to customize their products by taking advantage of these healthcare platforms that enable them to measure risks individually and accumulate related data. As they can reflect individual risks in pricing, they will also be able to offer a wide range of lower-priced health insurance products designed to attract consumers with low-risk profiles.

Most importantly, going digital has already been an irreversible trend for many years in line with the rise of e-commerce amid the growth of a tech-driven digital economy. This has fundamentally changed customer expectations, reinforcing customer preference to swift and convenient digital services. As a result, sales through the online insurance distribution have been increasing in Korea, and this trend is being accelerated in the wake of the COVID-19 outbreak, which has hampered face-to-face insurance sales.

The cyber marketing (CM) channel for insurance sales is growing fast in Korea. Non-life premiums from the CM channel increased by 23% in the second quarter of 2021 compared to the same period of the prior year. This stands contrast to the face-to-face channel, which grew by 2.7% over the same period. Compared to four years earlier, the volume of CM channel premiums more than doubled.

Trend of Non-Life Premiums from the CM Channel (2017-2021)
(Source: General Insurance Association of Korea)

The growth trend of the CM channel in the life insurance market is also remarkable. The total first-year premiums of life insurers via the CM channel surged by about 50% year on year to KRW 25.3 billion in 2020. As of August 2021, 18 life insurers reported a year-on-year growth rate of 190.4% in first-year premiums from the CM channel. Although the CM channel still accounts for a very small portion of the total premiums, the share has been growing rapidly.

Advanced technologies help insurance companies attract target customers effectively, offer instant quotes, improve customers experience, expand payment options, and process claims quickly. In other words, digital transformation is taking place across the whole value chain of the insurance industry. In order to survive and thrive in this digital era, insurers will continue to look at how they can adjust or innovate their business models to meet the growing need for personalized insurance products that are based on usage or tied to the behavior of insurance consumers.