KOREAN RE + Bulletin

Korean Insurance Market Outlook for 2024

The insurance market in Korea is anticipated to rebound in 2024, with an expected growth rate of 2.6%, following a period of negative growth in 2023. According to an outlook report released by the Korea Insurance Research Institute in October 2023, the total premiums are forecast to reach KRW 253.8 trillion. The life insurance market is expected to return to positive growth in 2024 after experiencing a sharp contraction in 2023. The non-life insurance market is likely to surpass the life insurance sector in terms of premium volume, as the market is projected to continue growing in 2024, albeit at a more moderate pace compared to the previous year.

**Korean Insurance Market Growth Rates**

The contract service margin (CSM) in the insurance industry is expected to maintain its growth trajectory for both life and non-life insurance in 2024. The CSM for life insurance is estimated to increase to KRW 69.9 trillion in 2024 from KRW 61.9 trillion in 2023. Similarly, the approximate CSM size for non-life insurance is projected to be KRW 64.6 trillion in 2023 and KRW 67.9 trillion in 2024, based on estimates for 11 domestic general non-life insurance companies.

The robust growth of the CSM suggests a potential increase in profits of insurers. However, there is an expectation of considerable volatility in investment income. Since the implementation of a stringent monetary policy in 2022, profitability deviations among insurers have widened, and this trend may persist into 2024 due to the prolonged period of high interest rates. With the anticipated high volatility in financial markets, an insurer's profit size may fluctuate, contingent upon its capabilities in managing investment income.

Life Insurance

The life insurance market is expected to recover in 2024 after declining steeply in 2023, with premium income forecast to grow by 0.6% to KRW 120 trillion in 2024. Premiums from protection-type insurance are projected to grow by 2% because sales of health insurance remain robust. The COVID-19 pandemic has become a driving force behind rising risk awareness and demand for health insurance coverage. This will provide a greater boost to insurers' marketing initiatives to increase protection-type products under the new regulatory frameworks of IFRS 17 and K-ICS. However, a limited economic recovery may have a negative impact on insurance sales growth as fewer consumers will have extra money to spend on insurance.

Savings life insurance premiums are projected to fall by 6.6% as life insurers will continue to focus on selling protection products. The demand for savings insurance is expected to decrease, with rising interest rates on bank deposit products making savings insurance look relatively less attractive. Variable life savings insurance is also faced with some headwinds due to a lackluster stock market, but a growing interest in investment products may push up the demand for variable savings insurance.

On the other hand, sales of life annuity premiums will remain solid because increasing life expectancy is fueling the growth of the demand for annuity plans, and rising crediting rates may lead to a renewed interest in annuities with an increasing number of baby boomers hitting retirement age.

**Life Insurace Premiums by Line of Business**

Non-Life Insurance

The non-life insurance market has been demonstrating greater resilience over the last few years compared to the life sector, and its premium volume is expected to grow by 4.4% to KRW 133.8 trillion in 2024. The growth will be supported by long-term personal accident and health insurance, general property and casualty (P&C) insurance, and retirement annuities.

Long-term insurance is projected to grow by 4.3% in 2024, driven by personal accident, health insurance and driver insurance. The motor insurance market is projected to slow down, growing by 1.8%, under the assumption that there is no premium rate adjustment. 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.

General P&C insurance will remain a strong driver of growth, although it still accounts for a small portion of the entire non-life market. Its premiums are expected to grow by 5.2% in 2024, and firm growth momentum will come from the casualty lines of business backed by liability insurance amid an increased awareness of the importance of liability protection for companies and the expansion of compulsory insurance.

**Non-Life Insurance Premiums by Line of Business**

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.

**Total Assets and Shareholders' Equity**

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.

K-ICS Ratios of the Korean Insurance Industry as of June 30, 2023

K-ICS Ratios Improved as of Late June 2023

The insurance industry showed an improvement in its solvency after the implementation of transitional measures under the new regime of the Korean-Insurance Capital Standards (K-ICS) at the end of the second quarter of 2023 compared to three months earlier. Its average K-ICS ratio increased by 4.7%p to 223.6%, according to the data released by the Financial Supervisory Service (FSS). The K-ICS ratio of life insurers rose by 4.9%p to 224.3%, while non-life insurers saw their ratio increase by 4.4%p to 222.7%.

Without the application of transitional measures, the K-ICS ratio of the insurance industry increased to a smaller extent (by 3.6%p) to 201.7% as of late June 2023. The ratio before transitional measures for life insurers climbed by 3.6%p to 196.2%, while there was a rise of 3.8%p to 210% for non-life insurers.

**Solvency Ratios of Insurers in Korea (2020-2023)**

The K-ICS ratio of an insurer is a key measure of how financially strong an insurer is, indicating its ability to absorb losses and pay insurance claims to policyholders. It is calculated by dividing the insurer's eligible own funds by the solvency capital requirement, showing the size of the company's capital compared to all the risk it has taken. The lower the ratio, the higher the likelihood that the company will default on its financial obligations.

The amount of insurers' available capital increased by 5.1% to KRW 257.3 trillion before transitional measures as of the end of June 2023, with their required capital expanding by 3.2% to KRW 127.5 trillion. The application of transitional measures resulted in increases of KRW 12.6 trillion in available capital and KRW 3.3 trillion in required capital, bringing the total amounts to KRW 259.5 trillion in available capital and KRW 116.1 trillion in required capital. Thanks to this relief impact of transitional measures, the K-ICS ratio was up by 21.9%p compared to the calculation before the application of transitional measures.

The increase in available capital compared to three months earlier was driven by a decrease in insurance contract liabilities amid rising interest rates and the inclusion of the contractual service margin into available capital. There was a growth in required capital due to increases in market risk and lapse risk.

**K-ICS Ratios and Impacts from Transitional Measures (as of Late June 2023)**

Insurers in Korea are required by law to maintain the ratio at 100% or above, and their ratios are regularly monitored by the FSS, which is responsible for identifying solvency issues of insurers at an early stage and intervening effectively in order to minimize losses to policyholders. 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.

Solvency Management is of Critical Importance for Insurers

Since January 2023, K-ICS has replaced the risk-based capital (RBC) regime in Korea. This new capital regime, which came into force alongside the implementation of IFRS 17, requires insurance companies to measure their assets and liabilities at market value and use a full fair-value balance sheet to calculate the required capital. It allows risk measurement to be more precise using shock scenarios, and the required capital of an insurer is defined as the value-at-risk (VAR) of the own funds of the insurer subject to a confidence level of 99.5%. With K-ICS becoming effective, the supervisory regime of the Korean insurance industry now aligns with global best practices and standards.

Insurance companies in Korea have proactively prepared for the introduction of K-ICS, as their capital buffers could be potentially squeezed when both assets and liabilities are measured at market value under the new capital regime. To bolster their capital, they have been taking various measures, such as issuing subordinated debt or hybrid capital securities, entering into coinsurance deals, and adjusting their product portfolios.

Recognizing that some insurers may need more time to improve their capital strength or adapt to the new requirements before having to fully comply with K-ICS, the regulator has allowed them to take transitional measures after prior approval. These measures aim to smooth out the financial impacts of the K-ICS implementation over time. As of late June 2023, 19 insurers have applied transitional measures, effectively preventing a significant decline in the K-ICS ratio of insurers.

These measures played an instrumental role in helping insurers adapt to the new K-ICS framework despite added pressure on their capital strength under the revised standards. On top of that, a higher interest rate environment is helping them reduce the value of their liabilities. When interest rates rise, the value of liabilities, particularly long-term liabilities, may decrease. This is because the present value of future obligations declines when discounted at higher interest rates. As a result, the overall capital requirements might be alleviated, as the reduced liabilities would result in a lower amount of capital needed to cover those obligations. This can provide some relief to insurers facing challenges in maintaining their solvency ratios during periods of rising interest rates.

Solvency capital management is of critical importance for insurers, as it ensures the stability and resilience of their operations in the face of varying market conditions and regulatory requirements. In light of the evolving landscape and the complexities introduced by the new K-ICS framework as well as increased interest rate volatility, insurers are expected to remain proactive in enhancing their capital strength. They will continue to adopt robust risk management practices, explore innovative financial solutions to bolster their capital buffers, and optimize their investment portfolios to better respond to market changes.

Joint Underwriting of Risks from the Residual Fire Insurance Market in Korea

Changes in Joint Underwriting of Fire Insurance

The Financial Services Commission (FSC) has approved the revision of the joint underwriting agreement on special building fire insurance in September 2023, as requested by the Korean Fire Protection Association (KFPA). The change is aimed at expanding the eligibility for joint underwriting of special building fire insurance and increasing the scope of coverage beyond fire damage.

The joint underwriting agreement between the KFPA and non-life insurers, which was initially approved by the FSC in 2021, allows them to collectively underwrite high-risk businesses to provide insurance to those who have difficulty obtaining coverage from the standard market. The objective of joint underwriting is to make sure that fire coverage is available when insurance applications for special buildings are rejected due to factors such as a history of fire incidents even though it is mandatory for special building owners to have fire insurance covers.

Under the revised agreement, apartment complexes with 15 floors or less and other multi-family residential buildings are eligible for fire insurance coverage available through joint underwriting in the same way as special buildings are covered. Currently, they are not classified as special buildings by law.

The revision has also broadened the scope of coverage to cover losses beyond those caused by fire, including damage resulting from natural disasters, building collapse, and leaks from water supply or drainage systems, as desired by the policyholder.

**Changes in Joint Underwriting of Fire Insurance**

Compulsory Fire Insurance Requirement in Korea

In Korea, the compulsory fire insurance requirement is imposed on property owners with regard to specified types of buildings, defined as special buildings, which are at risk of large fire losses such as third party death, bodily injury, and property damage caused by fire. Owners of special buildings are required to buy necessary insurance coverage under the Act on the Indemnification for Fire-Caused Loss and the Purchase of Insurance Policies.

Under the compulsory fire insurance policy in Korea, the statutory third party liability limits are KRW 150 million per person for death and permanent disability, KRW 30 million for third party bodily injury, and KRW 1 billion per event for damage to third party property.

**Compulsory Fire Insurance Coverage Types and Limits**

The types of properties defined as special buildings include the following:

Commercial buildings with 11 stories or more
Apartment complexes with at least one building of 16 stories or more and others of 15 stories or less
Buildings where areas above 2,000 square meters are occupied by schools, department stores, restaurants, supermarkets, cinemas, subway stations etc.
Railway stations, malls, markets, hospitals, educational establishments, factories, public venues, broadcasting stations, accommodation facilities and hotels above 3,000 square meters in floor area
Government-owned buildings above 1,000 square meters in floor area
Indoor shooting ranges

The scope of special buildings has been expanded to increase the fire insurance take-up rate and to ensure that social safety net is strengthened against the risk of fire events. Fire hazards present particularly significant risks to large commercial and residential buildings, endangering the safety of occupants, potentially causing property damage, and disrupting business operations.

However, there are some special buildings that are left uninsured due to difficulties in obtaining relevant insurance coverage because they are considered risky. For these high-risk special buildings, property owners would find it challenging and time-consuming to purchase fire insurance because they have to contact multiple insurance companies to figure out which insurers are willing to offer insurance coverage. Another challenge is that insurers try to avoid accepting some special buildings because they are considered to present extremely high risk. In particular, some chemical plants, waste recycling, and plastic manufacturing factories are declined by most insurers.

In response, the FSC took a set of measures to address those issues in 2021, including joint underwriting through the KFPA. The financial regulator also worked with the KFPA to create and operate a search system for fire insurance applications through which insurers can access applications that have been declined by other insurers. In other words, when a prospective insurance buyer submits an application to a single insurer and that insurer declines to accept the application, other insurers may access the application information with the consent of the applicant and initiate their underwriting process to evaluate the risk. This makes it easier for insurance buyers to get the insurance coverage as required by law without the need to contact multiple insurers. Any applications that have not been accepted through the search system will be automatically placed to the joint underwriting group led by the KFPA.

Growth of the Driver Insurance Market in Korea

Market Growth

Over the past few years, the driver insurance market in Korea has shown robust growth, driven by strengthened legal regulations related to traffic accidents. From 2016 to 2022, the compound annual growth rate (CAGR) of initial premiums of driver insurance has remained high at 8.6%. Notably, in 2020, there was a significant increase in new sales as the legal penalties for accidents in child protection zones were reinforced.

The volume of new contracts has continuously expanded, with policy counts reaching 4.8 million and new business premiums amounting to KRW 50 trillion in 2022. The proportion of initial premiums has also increased to 15.3% of the total long-term insurance segment. While 2021 experienced a sharp slowdown in growth due to concerns about overheated competition, 2022 witnessed a resurgence in new sales, indicating a revitalized market.

**Initial Premiums of Driver Insurance**

**Breakdown of Initial Premiums of Long-Term Insurance**

The recent increase in new sales of driver insurance is primarily attributed to amendments in the Road Traffic Act and the expansion of coverage in driver insurance products. In 2022, amendments to the Act heightened the risk of criminal penalties for causing traffic accidents due to changes such as the expanded designation of protection zones for children (vulnerable road users), enhanced pedestrian protection at crosswalks, and stricter criteria for major and gross negligence accidents.

Driver Insurance Coverage

Motor insurance and driver insurance are distinct types of insurance coverage. The primary distinction lies in the scope of protection each provides. Motor insurance is designed to protect the car owner against financial loss in the event of an accident involving the vehicle. It provides property coverage for damage to or theft of the car as well as liability coverage for the legal responsibility to others for bodily injury or property damage. In contrast, driver insurance is tailored to protect a specific driver, regardless of the car they are driving. While car insurance focuses on the vehicle and its owner, driver insurance centers around providing coverage for the person operating the vehicle, irrespective of the ownership of the car in question. In Korea, motor liability insurance is compulsory, but driver insurance is not mandatory.

Recently introduced driver insurance products align with the latest trend of strengthened legal regulations related to traffic accidents. Most of the driver insurance products launched after 2022 offer expanded coverage compared to previous offerings. They provide additional coverage as endorsements to adapt to the legal reinforcement trend, including increased coverage and limits for costs to deal with accidents, attorney fees, and fines. There is also a tendency for increased insurance benefits for bodily injury arising from mild personal accidents.

Loss Ratio

As the driver insurance market has expanded, the experience loss ratio has decreased, with an increase in earned premiums. However, the net expense ratio is showing an upward trend because of higher acquisition costs. The net expense ratio increased from 28.6% in 2016 to 38.2% in 2022, while the loss ratio decreased from 64% to 56.6% during the same period. The combined ratio also improved to 94.8% in 2022 after exceeding 100% in 2019 and 2020 due to a sharp increase in sales and expense ratios.

For long-term insurance products in general, acquisition costs are initially high, while insurance claims are relatively low in the early stages. Therefore, it is common for the expense ratio to increase in line with rising sales at the beginning, while the loss ratio decreases.

Future Prospects

The trend of strengthening laws for accident prevention is expected to continue, and in this context, it is expected that both the demand and supply for driver insurance products will keep expanding. As society continues to make efforts to prevent traffic accidents, there is a need to adjust the coverage and limits of driver insurance to cover the economic losses caused by traffic accidents.

Moreover, the supply of protection insurance products, which are expected to bring a higher contractual service margin (CSM), is likely to expand further, with the implementation of IFRS 17. From this perspective as well, it appears that there will be a continued focus on product development and sales expansion strategies for driver insurance products.

However, excessive competition through expanding coverage and limits could lead to mis-selling, moral hazard, and an increase in loss ratios. Increasing coverage and limits excessively can raise the likelihood of moral hazard for policyholders and may aggravate the insurance company's loss ratio.

In this respect, the Financial Supervisory Service (FSS) has issued guidance to raise consumer awareness of driver insurance and has encouraged insurance companies to exercise restraint in overheated competition and consider imposing coverage limits on attorney fees.

Concerns have been raised regarding insurers developing and selling driver insurance products in an unreasonable manner to increase the CSM, leading to a deterioration in the financial health of the insurers and an increased likelihood of mis-selling.

To address this, the FSS has decided to impose a maximum limit of 20 years on the coverage period of driver insurance. Currently, insurance companies have been setting coverage periods of up to 100 years. Policyholders aged 80 and above who may find it challenging to drive are not likely to actually receive meaningful coverage. This brings criticisms that the unnecessarily longer policy period may cause insurance churning - the practice of an insurer replacing existing coverage with a new policy based on misrepresentations.

Against this backdrop, it is important for insurers to pay close attention to product design and sales and seek proactive risk management, such as setting appropriate coverage limits and deductibles. Rather than offering excessive coverage, they need to develop and sell driver insurance products that encourage consumers to choose appropriate coverage levels in a way that prevents moral hazards among policyholders.