Sales Performance Increased, but Considered "Temporary Achievement"
Accounting Regulations and Win-Win Management: Supervisory Risks Remain
Struggling to Secure Momentum with Challenges in Europe and North America
The expressions of non-life insurance companies that recorded the highest-ever net profits last year are not bright. This performance is influenced by the new accounting standard IFRS17, and this year, with the financial supervisory authorities' guidelines changing, a decline in insurance companies' performance is inevitable. The burden of managing soundness indicators has also increased, and the loss ratio of their core business, automobile insurance, has risen, making it difficult to maintain profitability. Non-life insurers are putting all their efforts into strengthening growth momentum by increasing sales of insurance service contract margins (CSM) and reinforcing management organizations in Asia, North America, and Europe.
Lee Bok-hyun, Governor of the Financial Supervisory Service, attending and speaking at a meeting with heads of commercial banks held on the 19th at the Bankers' Hall in Jung-gu, Seoul. Photo by Jo Yong-jun
According to the non-life insurance industry on the 24th, all five major non-life insurers (Samsung Fire & Marine Insurance, DB Insurance, Meritz Fire & Marine Insurance, Hyundai Marine & Fire Insurance, and KB Insurance) recorded their highest-ever net profits last year but are on high alert due to unfavorable management conditions this year. The combined net profit of the five major non-life insurers last year was 7.4297 trillion won, an increase of about 1 trillion won compared to the previous year (6.4523 trillion won). It is the first time that the combined net profit of the five major non-life insurers exceeded 7 trillion won, and all five companies set new records for their highest-ever net profits.
Most non-life insurers attributed last year's strong performance to increased long-term insurance profits. A Hyundai Marine & Fire Insurance official, who increased long-term insurance profits by about 3.5 times (250%) in one year, said, "The cost related to loss-bearing contracts decreased due to the effect of raising the rates for indemnity insurance." A representative from Samsung Fire & Marine Insurance, the industry leader, also said, "Through strengthening product competitiveness and an active channel response strategy, we increased CSM by 5.8% (771.1 billion won) to 14.0739 trillion won in one year." CSM is an indicator that gauges an insurer's future profitability. Simply put, it means they performed well in sales and sold their core products effectively.
However, the industry evaluates this as "meaningless performance." They say it is only a short-term result caused by accounting illusions. Rather, they expressed concerns that stricter accounting regulations could negatively impact CSM performance, which determines company profitability.
Under the new accounting standard (IFRS17) introduced in 2023, an insurer's financial performance varies depending on actuarial (insurance accounting) assumptions. Under IFRS17, for no-surrender and low-surrender insurance, insurers assume a high surrender rate. This accounting assumes that future insurance payouts will decrease. This leads to an increase in the insurer's performance. Due to controversy over such flexible statistics, the Financial Supervisory Service issued guidelines in November last year to regulate insurers' arbitrary accounting practices regarding no-surrender and low-surrender insurance surrender rates. Consequently, there is significant concern that if non-life insurers adopt conservative assumptions for surrender rates this year, CSM performance and soundness indicators will deteriorate.
In fact, the soundness indicators of the five major non-life insurers declined last year. Looking at the solvency margin ratio (KICS) of the five major non-life insurers last year, only Meritz Fire & Marine Insurance rose by 5.4 percentage points to 247.6%. DB Insurance fell by 31.6 percentage points (201.5%), KB Insurance by 27.8 percentage points (188.1%), Hyundai Marine & Fire Insurance by 17.3 percentage points (155.8%), and Samsung Fire & Marine Insurance by 8 percentage points (265%), all showing declines. KICS is a key soundness indicator measuring an insurer's ability to pay insurance claims to customers on time.
A Hyundai Marine & Fire Insurance official said, "Due to the decrease in the discount rate on insurance liabilities and the decline in market interest rates, capital decreased, and the assumption of surrender rates for no-surrender and low-surrender insurance was strengthened, lowering KICS." He added, "We plan to strengthen KICS management through extending asset duration, issuing capital securities, and promoting reinsurance."
The rising loss ratio in automobile insurance is also a concern. Last year, the cumulative loss ratio for automobile insurance among the five major non-life insurers was 83.18%, up 3.16 percentage points from the previous year. The loss ratio is the ratio of insurance claims paid to premiums received, and the industry considers 80-82% as an appropriate loss ratio. Exceeding 82% means a loss. Due to increased accidents caused by cold waves and heavy snowfall, insurance payouts to customers increased, but the loss ratio worsened as automobile insurance premiums were lowered for the fourth consecutive year. The industry's collective decision to lower automobile insurance premiums despite knowing the loss ratio would rise is interpreted as a gesture to align with the supervisory authorities' policy of win-win finance.
Despite these management challenges, non-life insurers are increasing sales of protection-type insurance such as health and cancer insurance to maintain CSM profitability and are reorganizing overseas business organizations to strengthen mid- to long-term momentum. In particular, Samsung Fire & Marine Insurance CEO Lee Moon-hwa drew attention by presenting the 'Super Gap 2.0' strategy on the 22nd of last month, declaring a challenge to the North American and European markets. The company announced it would decisively surpass competitors operating in some Asian countries such as China, Japan, and Indonesia in overseas sales. North America and Europe operations are centered on Lloyd's, a UK non-life insurer invested in by Samsung Fire & Marine Insurance. In Asia, the company is accelerating market penetration centered on Samsung Re, its Singapore reinsurance subsidiary. The plan is to establish a global business value chain through a 'two-track' strategy. The industry's second-largest player, DB Insurance, is also accelerating its moves. At the end of last year, DB Insurance established a new overseas strategy headquarters above the existing overseas strategy and management departments and strengthened its operations in the U.S., Vietnam, and China.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
