Insurance Companies' Profitability and Soundness Improved, but... "Next Year Will Be Even Tougher"

Corona Windfall... Decline in Loss Ratios for Automobiles and Others
Foreign Companies Withdraw from Korean Market... M&A Shakeup

[Asia Economy Reporter Oh Hyung-gil] This year, insurance companies enjoyed windfall profits by securing profitability and financial soundness despite the crisis caused by the novel coronavirus infection (COVID-19).

Due to the suspension of redemptions in private equity funds, sales of savings-type insurance increased, and the implementation of social distancing measures led to lower loss ratios for major products such as automobiles. However, concerns over losses grew due to deteriorating investment conditions. As foreign insurance companies began to withdraw from the Korean market in earnest, the mergers and acquisitions (M&A) market heated up. Financial holding companies and private equity funds (PEFs) entered the insurance M&A market, signaling a major shift in the industry.

According to the Financial Supervisory Service (FSS) on the 31st, as of the end of September, the average Risk-Based Capital (RBC) ratio of insurance companies was 283.9%, up 7.5 percentage points from 276.4% at the end of June. The RBC ratio, which shows how much money an insurer can pay when policyholders claim insurance benefits, is an indicator used to measure the financial soundness of insurance companies. The Insurance Business Act mandates maintaining it above 100%, and the FSS recommends maintaining it above 150%.

As of the third quarter, all insurance companies exceeded the FSS recommended level, which is interpreted as having secured stable financial soundness ahead of the introduction of the new International Financial Reporting Standards (IFRS 17) and the new solvency regime (K-ICS) in 2023.

During the same period, insurance companies' profits also improved. The cumulative net income of insurance companies for the third quarter was 5.5747 trillion won, an increase of 6.1% (319.5 billion won) compared to the same period last year. The loss ratio for automobiles and long-term insurance fell due to the impact of COVID-19, reducing insurance operating losses.

However, due to the depreciation of exchange rates and prolonged low interest rates, foreign currency translation gains and interest income decreased, leading to a decline in investment profits, making it uncertain whether profitability will improve in the future.

Successive M&As... Industry Ranking Shake-up

This year, several foreign insurance companies came onto the market. Orange Life became part of Shinhan Financial Group (Shinhan Holdings), and Prudential Life found a new owner in KB Financial Group, becoming a successful model.

Other foreign insurers still have the potential to withdraw at any time. The French insurer AXA General Insurance has been negotiating a sale with Kyobo Life but the process is currently stalled, and the American MetLife Life is also continuously rumored to be up for sale. AIA Life and LINA Life, which have been considered potential sale candidates, have had their CEOs directly dismiss the sale rumors.

Following Lotte Non-Life Insurance, which was acquired by a PEF, KDB Life will also be sold to JC Partners, a PEF. KDB Life, which failed to sell three times in the past decade, is expected to be reborn as a co-reinsurance company through this sale. Co-reinsurance is a system where insurers cede not only risk premiums but also savings premiums to reinsurers to transfer interest rate risks and others.

Competition for insurance company rankings is expected to intensify further. Shinhan Life, the fourth-largest life insurer, is scheduled to launch in July next year, and Meritz Fire & Marine Insurance, ranked fifth in non-life insurance, is expected to surpass top companies in net income. Meritz Fire & Marine's cumulative net income for the third quarter was 323.6 billion won, ranking third after Samsung Fire & Marine Insurance (628.9 billion won) and DB Insurance (442 billion won).

Next year is also expected to be a hectic year. In January, the commission payment system for agents will be restructured to limit first-year recruitment commissions to 1200%, and in March, the Financial Consumer Protection Act, which imposes punitive fines for violations of sales principles, will be enforced. In July, employment insurance will become mandatory for special types of workers such as agents.