May 11 "2024 Key Trends and Issues in the Life Insurance Industry" Report
Profitability Secured by Increasing Protection-type Insurance Sales, but Soundness Declined
Tougher to Defend Due to Advanced Capital Regulations and Restructuring of Sales Commissions
Last year, the risk-based capital ratio (K-ICS, also known as KICS) of life insurance companies fell by 26 percentage points compared to the previous year, reaching 183%. Although companies shifted their sales strategies to focus on more profitable protection-type insurance products, their premium income remained at a similar level to the previous year.
According to the "Key Trends and Issues in the Life Insurance Industry 2024" report released by the Korea Insurance Research Institute on May 11, the premium income of the life insurance industry last year was 113.4 trillion won, a 0.9% increase from the previous year's 112.4 trillion won.
After the implementation of the new insurance accounting standard (IFRS17) in 2023, life insurers shifted their product portfolios to focus on protection-type insurance, which is advantageous for securing the Contractual Service Margin (CSM), a profitability indicator. However, premium income remained similar to previous years. The breakdown of premium income by product last year was as follows: protection-type insurance (49%), savings-type insurance (25%), retirement pensions (15%), and variable insurance (11%). The proportion of protection-type insurance products increased by 6 percentage points from 43% in 2023.
Alongside the expansion in protection-type insurance sales, the importance of General Agencies (GA) and insurance planners increased. This was because slow digital transformation meant that product sales continued to rely heavily on face-to-face channels. Last year, the share of new product sales by channel was: GA (39%), company employees (22%), insurance planners (22%), and bancassurance (financial institution insurance agencies, 16%). The shares of GA and insurance planners rose by 6 percentage points and 2 percentage points, respectively, compared to the previous year.
The Korea Insurance Research Institute noted, "As sales of protection-type insurance products, which require two-way communication with customers due to their complex structure, increase, the importance of GA has grown due to the spread of manufacturing-distribution separation and the scaling up of sales organizations. Furthermore, the slow pace of digital transformation and the resulting lack of growth in non-face-to-face sales have further increased the share of GA and insurance planners in the sales market."
Profitability indicators improved. Last year, the net profit of life insurers was 5.6 trillion won, up 7% from the previous year. Investment profit increased by 81% to 3 trillion won, while insurance profit fell by 16% to 4.3 trillion won. At the end of last year, the CSM balance stood at 59.7 trillion won, up 3.1% from 57.9 trillion won at the end of the previous year. The proportion of CSM within insurance contract liabilities was 10%.
However, soundness indicators worsened. At the end of last year, before regulatory transitional measures, life insurers' KICS ratio was 183%, down 26 percentage points from 209% at the end of the previous year. Although life insurers steadily increased external capital, including issuing 4.295 trillion won worth of capital securities last year to manage their KICS ratios, they struggled to defend the ratio.
The Korea Insurance Research Institute explained, "The decline in life insurers' KICS ratios was due to a reduction in the insurance liability discount rate, rising overseas interest rates, changes in actuarial assumptions, and the inflow of new contracts."
The Institute advised that issues such as soundness management, strengthening the function of guaranteeing retirement income, and implementing follow-up measures after the Insurance Reform Council led by the Financial Services Commission will become major topics for life insurers going forward.
It especially warned that as the liability valuation discount rate is expected to decrease in the future, it may become even more difficult for life insurers to maintain their KICS ratios. The Institute emphasized the need to pay attention to the impact of follow-up measures after the Insurance Reform Council?such as the advancement of capital regulations in the insurance sector and the restructuring of insurance sales commission systems?on the life insurance industry.
The Korea Insurance Research Institute called on financial authorities to provide policy support to help defend the soundness indicators of life insurers. The Institute stated, "Introducing a mandatory basic capital KICS ratio compliance standard, systematizing the management of insurance liability assumptions, and strengthening the transparency and accountability of financial information, along with regulatory improvements, are necessary to enhance the risk management capabilities of the life insurance industry and should be accompanied by policy support."
The Institute also predicted that, in addition to Woori Financial Group, which recently received conditional approval from the Financial Services Commission for the merger and acquisition (M&A) of Tongyang Life and ABL Life, other financial holding companies will continue to pursue acquisitions of life insurers. According to the financial industry, Korea Investment Financial Group is conducting due diligence with Samjong KPMG with the aim of acquiring a 100% stake in BNP Paribas Cardif Life Insurance.
The Institute projected, "Not only Woori Financial Group but also financial holding companies that do not own or have only a small presence in the insurance sector may attempt to acquire life insurers, which could change the structure and competitive landscape of the life insurance market in the future."
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