KOREAN RE + Bulletin

Preliminary Business Results of Insurers in Korea for 2023

The combined premium income for 22 life insurers and 31 non-life insurers reached KRW 237.6 trillion in 2023, down by 6% (KRW 15.2 trillion) from the same period last year. Life insurers saw their premium income decrease by 15.3% year on year to KRW 112.4 trillion in 2023. While they reported year-on-year growth for protection insurance (+3.2%), benefiting from a marketing strategy to increase protection insurance sales and a bearish stock market, life insurers saw decreases in premium income from savings (-38.0%), variable (-4.0%), and retirement annuity (-14.7%).

The non-life insurance sector outperformed their life insurance counterparts, posting a 4.2% increase in premium income year on year to KRW 125.2 trillion. This growth was driven by increases across all lines of business, including long-term (+3.5%), motor (+1.4%), general property and casualty (+8.5%), and retirement annuity (+6.6%).

In 2023, insurance companies in Korea reported KRW 13.4 trillion in net income, up by KRW 4.2 trillion (+45.5%) from the same period of the previous year. The net income for life insurers surged by 37.6% to KRW 5.1 trillion, while that for non-life insurers soared by 50.9% to KRW 8.3 trillion. This significant year-on-year increase was primarily due to the implementation of IFRS 9 and IFRS 17, which altered the accounting treatment of insurers' earnings. Additionally, the increase was supported by stronger sales of protection-type insurance for life insurers and long-term insurance for non-life insurers.

The insurance service result saw a marked improvement in 2023 compared to the previous year. While increases in protection-type and long-term premiums contributed to this positive outcome, they were not the sole factors. The implementation of IFRS 17 led to policy acquisition costs being deferred and amortized over the terms of the insurance contracts, rather than over seven years as previously. Furthermore, interest expenses on insurance contract liabilities are now recognized as investment gains or losses, thereby reducing expenses for the insurance service result.

However, the investment result has deteriorated, as more financial assets are measured at fair value through profit or loss (FVPL) under IFRS 9. Amid a low interest rate environment, there was an increase in valuation gains, but the treatment of interest expenses on contract liabilities as investment gains or losses put pressure on the investment results of insurers.

A diverging trend in profitability ratios was observed in 2023. The return on assets (ROA) increased by 0.40%p to 1.09%, while the return on equity (ROE) decreased by 0.20%p to 8.02%. The decline in ROE was attributed to an increase in net worth under the new accounting standards despite net income growth. Non-life insurers reported higher ROA and ROE ratios compared to life insurers.

As of the end of December 2023, insurers reported a decrease in assets by 6.5% (KRW 85.5 trillion) to KRW 1,224.6 trillion. This notable decrease can be attributed primarily to the revised accounting treatment that presents policy loans and deferred acquisition cost not as assets but as liabilities under IFRS 17. Life insurers accounted for 71.9% of total assets, but the disparity between the assets of life insurers and non-life insurers has been narrowing.

Over the same 12-month period, the insurance industry saw its total shareholders' equity jump by 87.4% (KRW 77.7 trillion) to KRW 166.6 trillion as of the end of December 2023. This increase is primarily due to a more pronounced contraction in the value of liabilities, resulting from the valuation of insurance liabilities at fair value.

**Total Assets and Shareholders' Equity** (Unit: KRW trillion)

Overall, insurers saw their net income surge year on year due to a rise in insurance service result as well as effects from the revised accounting treatment. However, the regulator emphasizes the need for insurers to preemptively manage their financial performance given the uncertainty involving changes in interest rates and exchange rates, coupled with the increase in financial assets subject to fair value measurement, all of which may expand the volatility of earnings and capital in the insurance industry.

Performance of Insurers' Overseas Operations for 2023

As of the end of 2023, 41 global offices are in operation in 11 countries by 11 insurance companies (4 life insurers and 7 non-life insurers). Of these, 25 global offices are based in Asia, namely in Vietnam (5), Indonesia (5), and China (4). Beyond Asia, there are 12 offices in the U.S., three in the UK, and one in Switzerland. A breakdown of the overseas operations by business license shows that 31 operations are licensed for insurance (4 for life insurance, 22 for non-life insurance, and 5 for insurance broker and claims adjuster) and 10 operations are licensed for financial investment business. In 2023, Hanwha Life expanded its global presence by establishing operations in Indonesia (general insurance) and Japan (real estate investment), thereby increasing the total number of global offices by two compared to the end of 2022.

**Overseas Presences of Korean Insurers** (Unit: Number of operations)

Financially, the Korean insurance sector turned a loss, reporting a net loss of USD 15.9 million (KRW 20.76 billion) from overseas operations in 2023, compared to a net profit of USD 122.5 million in the previous year.

Life insurers saw their net income increase by 86.1% year on year to USD 60.3 million, attributed to increased insurance sales and effects from the new accounting standards. In contrast, non-life insurers experienced a net loss of USD 76.2 million, down by USD 166.3 million from the previous year, primarily due to losses from significant natural disasters including losses of USD 106 million from Typhoon Mawar in Guam (May 2023) and the Maui wildfires in Hawaii (August 2023).

**Net Income for Overseas Business Operations of Korean Insurers** (Unit: USD million)

As of the end of 2023, the total assets held by the overseas business units of Korean insurers increased by 1.7% year on year to USD 6.44 billion (KRW 8.3 trillion) from USD 6.33 billion. Their liabilities decreased by 9.0% (USD 340 million) to USD 3.44 billion, primarily due to the impact of implementing new accounting standards (IFRS 17). Total shareholders' equity reached USD 3 billion, marking a 17.6% increase (USD 450 million) from the previous year. This rise was fueled by the adoption of the new accounting standards and an increase in paid-in capital, despite the net loss recorded.

**Financial Position of Overseas Business Operations** (Unit: USD 100 million)

K-ICS Ratios of the Korean Insurance Industry as of late December 2023

Following the implementation of transitional measures, the average solvency ratio of the insurance industry under the Korean-Insurance Capital Standards (K-ICS) increased by 8.1%p to 232.2% at the end of December 2023. The K-ICS ratio for life insurers rose by 8.4%p to 232.8% quarter on quarter, while the ratio for non-life insurers climbed by 7.6%p to 231.4%. As of late December 2023, a total of 19 insurers (12 life insurers and 7 non-life insurers and reinsurers) applied transitional measures.

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

The main driver for the changes in the K-ICS ratio was a reduction in capital requirements. Both available capital and required capital decreased, but the reduction in required capital was more significant. The amount of insurers' available capital decreased by KRW 0.1 trillion to KRW 261.6 trillion after the implementation of the transitional measures in late December 2023. Their adjustment reserves increased by KRW 8 trillion due to inflows from new contracts. Conversely, a decline in interest rates increased insurance liabilities, leading to a decrease in accumulated other comprehensive income by KRW 6.4 trillion. Annual dividend payments of KRW 3.5 trillion also contributed to the decline in available capital.

The application of transitional measures led to a quarter-on-quarter reduction of KRW 4.1 trillion in required capital as of late December 2023, bringing the total to KRW 112.6 trillion. Despite an increased market risk exposure of KRW 4.1 trillion including stock price volatility and exchange rate fluctuations, lapse risk was significantly reduced by KRW 17.8 trillion due to the revised criteria for assessing the risk of large-scale policy surrenders and other discontinuances, alongside a reduction of life and long-term policy risks by KRW 8.9 trillion.

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

Before the transitional measures, the K-ICS ratio of the insurance industry stood at 232.2% at the end of December 2023. Given the continuing uncertainty in financial markets, the regulator will maintain rigorous oversight and vigilance over vulnerable insurers to ensure they build sufficient capital buffers.

Challenges in the Digital Transformation of the Insurance Sector

Amidst the rapid advancement of the Fourth Industrial Revolution and accelerated shifts towards a contactless society due to the COVID-19 pandemic, the insurance sector is actively embracing digital transformation to meet dynamically evolving business demands.

Until now, the industry has witnessed steady growth, driven by an increase in population, industrial development, and economic expansion. Concurrently, the emergence of new risks has necessitated expanded coverage offerings from insurers. While the insurance sector continues to expand, it is important to note that the pace of growth is moderating, calling for a new phase of strategic adaptation.

Historically, the profitability of the insurance industry remained stable, with only minor fluctuations prior to the pandemic. However, insurers have observed a temporary spike in profits after the pandemic. In particular, the net income result for 2023 was affected by the adoption of IFRS 9 and IFRS 17, which increased earnings volatility. Although the Return on Equity (ROE) for insurance companies has shown signs of recovery, the industry faces a downtrend in long-term profitability.

**Net Income Trend for Insurers (2010-2023)** (Unit: KRW trillion)

**ROE Trend for Insurers (2010-2023)** (Unit: %)

Meanwhile, low consumer trust in the insurance industry remains a cause for concern, as evidenced by a high proportion of complaints against insurers in the financial industry. Specifically, insurance-related grievances accounted for 58% (48,000 cases) of the total complaints against financial institutions in 2017, while the number rose to 62.5% (51,000 cases) of the total number of complaints (87,000 cases) in 2021. The primary complaints against life insurers were related to solicitation practices, whereas non-life insurers faced issues mainly around premium calculation and claim payments.

The negative public perception on the insurance industry, coupled with declining growth and profitability, has to do with information asymmetry within the market and the inflexibility of traditional business models.

When consumers exploit asymmetric information, it will lead to adverse selection and moral hazard. Similarly, when manufacturers exploit asymmetric information, the benefits for consumers are often limited. Additionally, the inflexibility of insurers' business model raises concerns about their long-term sustainability in the face of a rapidly evolving financial landscape.

In response, many industry leaders view digital transformation as an essential strategy to address information asymmetry and improve the sustainability of the insurance business.

Digital transformation refers to the process of integrating advanced digital technologies into our societal frameworks, fundamentally altering the existing structure. Businesses are establishing robust information communications technology platforms, utilizing the Internet of Things (IoT), cloud computing, artificial intelligence (AI), and big data analytics to innovate how operations are managed and services are delivered to customers. To seek digital transformation, businesses undergo digitization and digitalization. Digitization refers to the process of converting analog data into digital form while digitalization refers to the broad adoption of digital technology across all business aspects.

Recently, insurers have been actively implementing digital transformation initiatives across all critical business processes, including insurance application, underwriting, contract signing, maintenance, payment, and management.

Through the adoption of digital transformation strategies, the insurance sector aims to enhance operational efficiency and customer engagement. This enhancement is achieved by refining the data collection and analysis processes and facilitating the exchange of information among various stakeholders involved in transactions. By integrating consumer-sourced data with insights from third-party service providers, the insurance industry can expand and further segment the market. This segmentation allows for a more tailored response to the diverse needs of the customers, thereby increasing the efficiency and agility of business models. Moreover, the entry of non-traditional entities such as insuretech startups and big tech companies introduces both fresh partnership opportunities and heightened competition, signaling forthcoming structural changes within the industry.

Digital transformation also offers significant benefits to consumers, simplifying the comparison of insurance products and price quotes via online platforms, thus balancing information access and enhancing trust in the industry as well as increasing the convenience of insurance services.

To foster effective digital transformation, insurers must revisit their implementation strategies and innovate across infrastructure and organizational culture. Regulatory support is also crucial, enabling economies of scope, enhanced policy framework, and a shift in business models.

**Key Tasks for Effective Digital Transformation**

Medical Expense Insurance: Current Challenges and Reform Initiatives

Medical expense insurance is a pivotal component of private health insurance, alleviating the financial burden of medical costs for the public. In 2021, total medical expenses reached KRW 111.1 trillion, with the National Health Insurance (NHI) program and private health insurance collectively covering approximately 76% of the total expenses as insurance benefits. The NHI program accounted for 64.5% (KRW 71.6 trillion) of these expenses, while private medical expense insurance covered 11.2% (KRW 12.5 trillion), addressing most out-of-pocket expenses (copayment and non-benefit expenses).

Medical expenses in Korea increased incrementally. In 2022, the ratio of total medical expenses to GDP in Korea stood at 9.7%, surpassing the OECD average of 9.2% for the first time. The rate of increase is much higher than other OECD countries, raising concerns about the growing financial burden on individuals. From 2017 to 2022, the average annual medical expense per capita rose by 10.4%, which is the highest among OECD countries.

**Medical Expenses per Capita** (Unit: USD 1,000)

(Sources: OECD Health Statistics (2023) and Korea Insurance Research Institute, December 7, 2023)

By 2025, Korea is expected to enter a "super-aging" society, marked by low fertility rates and increased life expectancy. Chronic disease prevalence among those over 65 is estimated to double from 2008 to 2020. With an aging policyholder base, medical expense claim payments are also anticipated to rise.

**Estimated Changes in Medical Payment for Medical Expense Insurance Policyholders by Age Group**

However, the sustainability of medical expense insurance is in question due to widening underwriting losses. Due to the trend of low fertility rate and the rapidly aging society, there is a greater financial burden on the public. If medical expense insurance fails to cover expenses outside the NHI program, this could deepen the health divide between socioeconomic groups. Therefore, it is paramount to reinforce the role of medical expense insurance and ensure its sustainability.

**Changes in Medical Expenses** (Unit: KRW trillion)

**Medical Expense Insurance Claims Paid** (Unit: KRW billion)

The high loss ratio of medical expense insurance is attributed to several structural issues: inadequate design of the product (0% or low copayment), overtreatment by healthcare providers, excessive healthcare spending, and insufficient oversight of non-benefit medical expenses.

In response, the overall product design was enhanced in July 2021 with the introduction of the fourth generation medical expense insurance, which evolved from the first to the third generation policies to include higher deductibles. To address overtreatment and unnecessary medical spending, the annual renewal of premiums for the rider is now adjusted based on a sliding scale according to the amount of claims paid out for non-benefits expenses in the previous year. The range of discounts and surcharges for the rider premiums is determined by the loss ratio.

There have been ongoing calls for more systematic management of non-benefit expenses to prevent overuse and misuse of healthcare services, which impact both supply and cost of care. The revised Insurance Business Act, which was passed on October 6, 2023, aims to support this through the digitalization of medical expense insurance claim processing. In February 2024, the Korea Insurance Development Institute was designated as the responsible agency for establishing and operating the new claim processing system. Starting in October 2024, insurance claim documents will be transmitted electronically from medical facilities to insurance companies upon the request from the claimant. This digital platform will facilitate more structured oversight of non-benefit treatments, which are deemed less safe and effective, allowing for the re-assessment and better administration of these medical services.

The government is actively working to improve the design of medical expense insurance to ensure its long-term sustainability. Additionally, it plans to revise the criteria for medical expense claim payments for medical procedures like cataract surgeries, provide services that enable consumers to compare medical expense insurance plans, and standardize the fee-for-service scheme for the non-benefit expenses. These initiatives are expected to position medical expense insurance for a sustainable future, thereby increasing the benefits available to consumers.

The Impact of Changes in the Electronic Financial Market on the Insurance Industry

In the financial market, initial digital innovation efforts focused on facilitating electronic financial transactions aimed at automating and improving the operational efficiency of financial institutions. However as digitalization has accelerated, the scope of digital innovation has expanded, enabling consumers to access financial products and services and conduct transactions at any time and place.

The development of new technology, deregulation, and pandemic-induced rules and restrictions have significantly increased the demand for electronic financial transactions. In turn, this led to exponential growth in the digital financial market. To address these changes, the partially revised Electronic Financial Transaction Act was passed in 2023 and will take effect in September 2024.

Historically, topics such as financial payment, digital banking, electronic payment and settlement did not garner much interest within the insurance industry. However, insurers are now faced with the task of engaging tech-savvy consumers who prefer to transact online as the financial landscape evolves with digitalization and changing consumer behaviors.

While "Big Tech" companies are attracting more customers through their platforms, insurers have traditionally interacted with their customers face-to-face or via their websites and mobile applications (apps). If this continues, insurers may face disadvantages due to their limited distribution channels compared to Big Tech companies.

The advent of payment apps is transforming the landscape of financial payments and settlements. Insurers can also make significant inroads into these markets. Various insuretech companies, deriving from conventional financial businesses, are primarily focused on payment solution technology that facilitates the flow of money for consumers.

Insurers and insuretech companies abroad are endeavoring to expand their customer base and offer new services by utilizing electronic payments and settlement infrastructure. They provide services such as prepaid card services and “pay later” options. In fact, insurance services are already on the shelves to cover inherent risks associated with deferred payment schemes.

If an insurer registers as a prepaid card service provider and offers prepaid cards to customers, these customers will be able to load money onto the cards and use them to purchase a variety of products and services. By accessing data on consumer usage behaviors and spending patterns, insurers can use this information to develop new insurance products and services, and deposit the insurance payout onto the prepaid cards.

**Examples of How Prepaid Cards Can Be Used for the Insurance Business**

Most Buy Now Pay Later (BNPL) services offered by insurers and insuretech companies internationally allow for installment payments for premiums, akin to credit card installment payments. They also offer insurance products that cover any risk of non-payment in the event of settlement.

By entering the payment and settlement service market, insurers will be able to collect diverse customer data. Utilizing this data, insurers can offer various risk management services tailored to the customer's needs. However, these reforms in the electronic financial industry and the resulting changes could expose financial consumers to new risks, including cybersecurity threats.

The evolution of the electronic financial market landscape is poised to significantly affect the competitiveness of the insurance industry, particularly in aspects of customer interface (distribution channels), insurance products on digital platforms, and the development of new data-driven business models.

**Impacts of Changes in the Electronic Financial Market on the Insurance Industry**

It should be noted, however, that the payment and settlement business itself will not yield immediate profit. To operate payment and settlement services, it requires significant investment in infrastructures, the acquisition of specialized resources, and the establishment of a robust risk management system to address security issues. Consequently, insurers should adopt a long-term strategic approach rather than seeking immediate financial gains. Engaging in partnerships or collaborations with insuretech companies, rather than directly managing these operations, can provide insurers with valuable market experience.

Korean Re is playing a leading role not only in traditional insurance sectors but also in venturing into new domains, actively identifying emerging customer needs. It collaborates closely with industry experts to develop innovative products that mitigate new risks and to accurately calculate and propose reinsurance rates.