"Insurance Companies Should Actively Utilize 'Contract Transfers' in Business Structure Reorganization"

Korea Insurance Research Institute Publishes Report on "Restructuring Insurer Business Structures Using Contract Transfers"
Increased Operating Expenses Due to Fierce Competition in New Life Insurance Contracts
"Contract Transfers Can Help Secure Growth and Enhance Competitiveness"

There has been a suggestion that insurance companies should actively utilize contract transfers. The idea is to restructure business by transferring insurance contracts of less competitive businesses to other insurers and acquiring contracts in areas where they want to focus their capabilities.

The Korea Insurance Research Institute published a report titled "Restructuring Insurance Company Business Structures Using Contract Transfers" on the 23rd, containing these details.

Contract transfer is the process of transferring contracts held by one insurer to another insurer. It is divided into "mandatory contract transfer," applied based on the Act on Structural Improvement of the Financial Industry when an insurer becomes insolvent, and "voluntary contract transfer," which occurs between insurers with approval from financial authorities.

An illustration depicting the period before an insurance contract by ChatGPT. Provided by ChatGPT.

Contract transfers can improve management efficiency by enhancing financial soundness, dispersing risk, and reducing operating costs. However, their utilization in South Korea remains extremely low. There has been only one voluntary contract transfer by a domestic insurer since 2003. At that time, Hana Life transferred insurance contracts to Allianz Life (now ABL Life) to normalize management by converting into a bancassurance (insurance sold through banks) specialized company.

Overseas insurers in countries such as the UK and Germany actively use contract transfers to maintain business continuity, improve management efficiency, and sustain financial soundness. In 2020, UK insurer Rothesay Life transferred its personal pension insurance business segment, valued at approximately 140 million euros (about 221.8 billion KRW), held in Ireland, to Irish insurer Laguna Life with approvals from the UK court and the Central Bank of Ireland. This was because Rothesay Life lost business rights outside the UK due to Brexit (the UK's withdrawal from the European Union). In 2019, Canada Life transferred life and pension run-off contracts to Scottish Friendly to focus on its core business.

The Korea Insurance Research Institute stated that South Korean life insurers should not insist solely on selling new contracts but should also use contract transfers as a growth tool. The underwriting margin, which represents the cash flow of life insurers, has turned into a loss since 2022 and has continued to worsen for three consecutive years. As of the end of September last year, it recorded a loss of 14.7 trillion KRW. The underwriting margin is the amount obtained by subtracting paid insurance claims and operating expenses from earned premiums. Recently, intensified competition to expand new contracts has significantly increased operating expenses, resulting in continued underwriting margin losses. Utilizing contract transfers can help reduce operating expenses.

It can also be used for portfolio adjustment and strengthening competitiveness. Noh Geon-yeop, a research fellow at the Korea Insurance Research Institute, explained, "One method is to transfer pension insurance contracts to other insurers for a health insurance specialized company and acquire health insurance contracts. Acquiring variable insurance contracts from other insurers to expand variable insurance assets or acquiring long-term insurance contracts to secure profitability for digital insurers are also good methods."

The financial authorities have recently laid the groundwork for revitalizing contract transfers through the Insurance Reform Committee. In the past, regulations required comprehensive transfers of all insurance contracts with the same basis for calculating reserves. However, going forward, insurers will be able to transfer insurance contract portfolios by sales channel to utilize contract transfers for non-core business restructuring or capital reallocation. The review criteria for approving contract transfers will also be improved so that transfers can be approved if deemed necessary, even if the insurer’s management or financial condition is not favorable.