[2026 Economic and Financial Outlook Focus] ③ Insurance Industry in Crisis: Core Business Falters Amid Mounting Regulations

Insurance Underwriting Profit Plunges 30% in Q3 Last Year
Fifth-Generation Indemnity and Auto Insurance Premium Hikes in Focus
Responsibility Structure System Expanded
Stricter Regulations Including Basic Capital K-ICS
Focus on New Markets

Editor's NoteThe Year of the Fire Horse has dawned. This year, the Korean economy is expected to shift toward a genuine improvement in growth rates, leaving behind last year's ultra-low growth that followed the aftermath of the martial law crisis. However, compared to the past, when periods of darkness were followed by brighter recoveries, this rebound is expected to be modest. Key variables to watch include global supply chain shifts driven by the spread of protectionism, the sustainability of the artificial intelligence (AI) boom fueling Korea's semiconductor exports, as well as high exchange rates and real estate issues. The banking sector faces a challenging year, with household loan restrictions putting downward pressure on profits and intensifying competition in corporate lending. The insurance sector is also expected to see its profitability and soundness threatened due to sluggish core business and tighter regulations. Amid these tough conditions, the core policy and supervisory priorities for financial authorities are household loan regulation, productive finance, and financial consumer protection. The authorities plan to continue regulating the total volume of household loans while focusing on easing regulations and providing incentives for productive finance. Over four installments, we will examine the major challenges that Korea's economy, financial industry, and policies must overcome this year, under the energy of the 'Red Horse.'

This year, the insurance industry is expected to see its profitability and soundness threatened due to sluggish core business, tighter regulations, and an unfavorable investment environment amid uncertain economic conditions. Insurance companies, facing structural limitations from low birth rates and an aging population, are likely to pursue restructuring through cost efficiency and mergers and acquisitions (M&A). Key tasks will also include pioneering new markets such as pet insurance and long-term care services, accelerating digital transformation using artificial intelligence (AI), strengthening consumer protection, and participating in productive finance.

An image depicting the slowing growth of insurance companies, generated by ChatGPT. ChatGPT

Insurance Industry's Core Business Growth Falters... Will Premium Hikes for Fifth-Generation Indemnity and Auto Insurance Reverse the Trend?

According to the financial sector on January 7, the cumulative net profit of 53 insurance companies for the first three quarters of last year was 1.12911 trillion won, a 15% decrease compared to the same period the previous year. Profitability deterioration in their core business was even more pronounced. Insurance underwriting profit for the same period was 858.71 billion won, down 30.1% from the previous year.

The main reason insurance companies are struggling in their core business is the worsening loss ratios of key products such as indemnity and auto insurance. As of the third quarter of last year, the loss ratio for fourth-generation indemnity insurance products currently being sold reached 147.9%. This means that for every 1 million won collected in premiums, 1.48 million won was paid out. Loss ratios for previous generations of indemnity insurance-first (113.2%), second (112.6%), and third (138.8%)-all exceeded 100%. The cumulative deficit for indemnity insurance over the five years from 2020 to 2024 surpassed 10 trillion won.

To reduce the burden of deficits, insurance companies have decided to raise indemnity insurance premiums by an average of 7.8% this year. Premiums for the fourth generation, which has the highest loss ratio, will increase by 20%, the third generation by 16%, the second generation by 5%, and the first generation by 3%.

Auto insurance, which saw its loss ratio surpass the break-even point last year, is also likely to see a premium increase in the 1% range this year. As of November last year, the cumulative auto insurance loss ratio for the four major non-life insurers (Samsung Fire & Marine Insurance, DB Insurance, Hyundai Marine & Fire Insurance, and KB Insurance) was 86.2%, up 3.8 percentage points from the previous year. In the industry, a loss ratio of 82% for major insurers is considered the break-even point for auto insurance.

The hidden card for insurance companies to recover their core business this year is expected to be the fifth-generation indemnity insurance. This product, to be launched in the first half of the year, aligns the co-payment rate for outpatient services not covered by national health insurance with the rate for covered services and differentiates coverage for non-covered items based on severity. Alongside this, a plan to designate certain non-covered items that have led to overtreatment as managed benefits will be implemented, allowing insurers to reduce excessive insurance payouts. However, a key variable will be whether enough incentives are provided for existing indemnity policyholders to switch to the fifth generation.

The Korea Insurance Research Institute predicts that the overall insurance premium growth rate for the industry this year will be 2.3%, down 5.1 percentage points from the previous year. Hwang Inchang, Head of Financial Market Analysis at the Korea Insurance Research Institute, stated, "After a significant deterioration in insurers' financial soundness in 2024, this year and last year are when profitability declines are becoming a reality," adding, "In the mid- to long-term, declines in soundness and profitability will reduce risk protection capacity and future response capabilities, leading to slower growth."

Challenging Regulatory Environment... K-ICS and Productive Finance Add Pressure

This year, the regulatory environment for insurers will become even more stringent. The most notable is the 'K-Insurance Capital Standard (K-ICS)' regulation, which will be introduced this year with a grace period and is scheduled for full implementation in the first quarter of next year. The K-ICS is an indicator of whether an insurer can pay claims using only its own capital, without external capital expansion. With stricter standards than the existing K-ICS, insurers will now need to focus on raising capital mainly through paid-in capital increases or new types of basic capital securities, rather than supplementary capital such as subordinated bonds.

From July this year, the responsibility mapping system will be fully applied to small and medium-sized insurers with total assets under 5 trillion won. This system clearly defines internal control responsibilities by executive, ensuring each executive actively fulfills their internal control duties. Large insurers that introduced this system last year responded by appointing internal control officers or establishing internal control committees, expanding personnel, and reorganizing their structures. In November last year, the Financial Supervisory Service inspected the operation of the responsibility mapping system at these insurers, urging them to strengthen internal controls from a consumer protection perspective. As a result, the focus of the system's introduction and operation at insurers this year will also be on consumer protection.

The government's drive to expand productive and inclusive finance is also expected to add pressure on insurers. The government recently announced plans to create a National Growth Fund worth 150 trillion won. The government expects insurers, who collectively manage about 1,150 trillion won in assets, to play their part in productive finance. To this end, from the first quarter of this year, the government will ease capital regulations on insurers' fund and infrastructure investments and support more sophisticated measurement of investment capacity, driving changes in the financial system. Last year, insurers pledged to contribute 40 billion won to a bad bank for inclusive finance. They also introduced premium discounts and payment deferral policies to support low birth rates. Similar investments and products are expected to be prepared this year. Noh Geonyeop, Head of Financial System Research at the Korea Insurance Research Institute, said, "Insurers need to leverage participation in productive finance as an opportunity to enhance their role as long-term investors and improve returns," adding, "They could consider developing and continuously participating in insurance products such as annuities based on policy fund returns."

The Solution Lies in New Markets... Efficiency Through AI Is Essential

This year, insurers are expected to actively pursue new markets. As the insured population continues to shrink while costs rise due to increased life expectancy, creating new demand is essential to overcome these structural limitations.

Life insurers are expected to expand aggressively into the long-term care business in response to the transition to a super-aged society. Insurers operating long-term care subsidiaries have recently begun capital injections, signaling the start of fierce competition to expand infrastructure. In June last year, KB Life Insurance conducted a paid-in capital increase of 50 billion won for KB Golden Life Care. In the same month, Hana Life Insurance invested 30 billion won to establish its long-term care subsidiary, Hana The Next Life Care. In September last year, Shinhan Life Insurance injected 25 billion won into Shinhan Life Care, and Samsung Life Insurance also injected 31 billion won into Samsung Noble Life in the same month.

Non-life insurers are expected to compete fiercely to secure customers in the pet insurance market. While the pet-owning population exceeds 15 million, the pet insurance penetration rate remains below 2%. Non-life insurers see significant growth potential in this sector and are developing various special contracts. Meritz Fire & Marine Insurance, which entered the pet insurance market first, and DB Insurance, which secured four exclusive rights for pet insurance products last year alone, are locked in fierce competition for leadership. MyBrown, which launched last year as Korea's first dedicated pet insurance company, recently raised 17 billion won in investment from Korea Development Bank and others to accelerate its market entry.

Insurers are also expected to accelerate the enhancement of non-face-to-face services and the advancement of AI to improve cost efficiency and provide customized services to customers. Additional investments and measures to prevent increasingly sophisticated insurance fraud and personal/credit information hacking are also essential. With U.S. policy rates still expected to trend downward, insurers will need to manage capital soundness even more proactively. Seo Jiyong, Professor of Business Administration at Sangmyung University, said, "If the base rate falls further this year, it will negatively affect the K-ICS," adding, "It is time for the insurance industry to pursue efficiency through business diversification via M&A and digital transformation of insurance sales."