Risk-Based Capital to Change Paradigm of Insurance Industry
The adoption of risk-based capital (RBC), an evaluation system designed to provide a capital adequacy standard related to risks and to raise a safety net for insurers, will change the paradigm of the insurance industry, Allianz Life Insurance CEO said.
"The adoption of RBC means much more than the strengthening of regulations on insurers' solvency ratio. It means the paradigm of the whole industry would change," said Cheong Mun-kuk, president & CEO of Allianz Life Insurance, in an interview with The Korea Times. Solvency ratios are measures to assess a company's ability to meet its long-term obligations.
Currently, the regulator simply assesses insurers' ability to pay out insurance money. With the adoption of RBC system, however, the regulator will be assessing the level of risk each insurance firm faces in asset management from 2011.
The new rule, which is used to set capital requirements considering the size and degree of risk taken by the insurer, is likely to pull up the solvency ratio of Allianz, which has managed its assets conservatively.
"In the past, it was OK to do business in a risky way as long as you generated profit. It won't be so anymore. The insurers will have to think about risk," Cheong said. As the risk will be linked with capital, risky management will result in shareholders having to pay more as companies will need to hold more capital.
Risk Management Key of Insurers
Cheong said that Allianz's solvency ratio in terms of RBC stands at 361.1 percent as of September, 142.4 percentage points higher than the industry average of 218.7 percent. In fact, Allianz adopted a strict risk management system of its own in 2002, watching the duration of liability, cash flow and the interest rate of each product and liability.
"Insurance is a long-term product that lasts for decades. You get pension insurance after retirement. Financial stability matters more than anything else to pay the insurance money one has promised to customers," Cheong said.
Cheong expected Allianz to have the best risk management system in the country in 2011 when the RBC system will become obligatory.
He added that Allianz Group, the global insurer based in Germany, rose to the top of the world in market cap without getting any government support, while some global giants faltered amid the global financial crisis. "It shows that Allianz Group was good at risk management," Cheong said.
He added that as an insurance CEO, he would choose things that benefit Allianz in the long-term perspective rather than focus on short-term profit. "Obsessing on short-term performance could eat into growth engines in the longer term. I don't think it's the right strategy for the insurance business, which should be managed conservatively and last for longer periods of time." Hence, Allianz refrained from headhunting competition when other life insurers only concentrated on increasing the number of salespeople, on the determination that it would do harm in the long-term perspective.
He added that insurers should stick to their core business. "Allianz, for example, sold Dresdner Bank to Commerzbank before the outbreak of the global financial crisis. There was some talk about diversification, but the key should be concentrating on one's core business," he said.
He added that insurance companies should also put more weight on traditional insurance products rather than on investment products like derivative insurances. "Non-savings insurance such as whole-life insurance should be the very first, and only then should the rest of the products come."
Insurance Should Turn Customer-Oriented
Cheong pointed out that the financial market in Korea had been supplier-focused rather than customer-oriented, unlike the manufacturing industry where customer satisfaction is the key for each process of the business.
"It is, however, changing. NGOs, including consumer groups, are actively making their voices heard, and consumers are becoming more sophisticated, knowing how to voice their demand on products. Only those who adapt to these changes in the financial market will survive," Cheong said.
The CEO believes whole-life insurance and annuity insurance will lead the market.
Regarding whole-life insurance, Cheong said the market isn't saturated yet. Though many people have subscribed to whole-life insurance for their family, the return is still too low. "Whole-life insurance aims at guaranteeing the financial stability of the family when the subscriber passes away. However, the average payout the family can get stands at far less than 100 million won here. Few people would say it is enough to sustain a family. There is still room for more subscriptions."
He attributed the low insurance coverage to the seller-oriented market. "It wouldn't have been easy for salespeople to convince the subscribers that they need, say, 500 to 600 million won insurance money for their family since the premium would go up. They didn't think about the consumer's needs. They just wanted to sell," he added.
Allianz focuses on up-selling, or selling additional insurance products to its old subscribers through tailored marketing and customer management. "How to secure a loyal customer base would determine the competitive edge of the insurance businesses. I ask sales managers to continue studying portfolios of subscribers to provide them with adequate products and services."
Annuity Insurances to Lead Market
Cheong said that the market is likely to need annuity insurance most. "Korea is one of the most rapidly aging societies in the world, and the birth rate is historically low. The baby boomers, who were born between 1956 and 1963, are about to retire."
He said Koreans are not prepared for retirement. "In other developed countries, insurance and annuity take between 30 and 40 percent of people's financial assets. In Korea, however, they take only around 17 to 18 percent.
"People would want to maintain the level of life they enjoyed before retirement, but they can't do that with only national and corporate pensions. The best way to create income for then is annuity insurance," Cheong said, stressing that the money for retirement should be managed safely.
The CEO said retirement planning and old age provision seem to have become the main theme of the global insurance market. A new silver market is being formed in products such as long-term care insurance policies.
He added that as a global insurer, Allianz has a stock of experience regarding the retirement market from its experience in Germany and the United States. Its "Powerdex Annuity Insurance," which is linked to the stock market index, was first launched by Allianz in the United States, and later introduced to the Korean market with success. Cheong has also subscribed to the retirement product.
Diversification of Sales Channel
The insurance industry has seen a diversification of the sales channels. Bancassurance, or insurances sold at banks, telemarketing, and general agencies led the market while traditional models depending on salespeople are slowing down.
While some insurance companies regard such new channels as threats, Cheong said the diversification of channels means more access to customers. "In other words, consumers have more access to insurance products," he said.
He explained that the diversification enabled Allianz to dig up a new customer base. "The bancassurance customers, for example, are mostly wealthy private banking (PB) customers. They were hardly accessible to salespeople," he said, adding that it means a new customer group for the insurer.
The CEO thus believes there should be ''innovative management.'' "It is about who attracts wealthy customers, loyal customers. There were only six life insurance companies when I started my career in the business, but now there are 22. Insurers also have to compete with other financial businesses like banks and investment companies over the retirement market."
He said that Allianz should differentiate itself from others to win the competition, citing "Powerdex Annuity Insurance" as a prime example.