Soaring Loss Ratio Hurts Non-Life Insurers
By Yoon Ja-young
Non-life insurers were relatively safe from the global financial crisis compared to life policy providers.
They continued double digit growth in the 2009 fiscal year thanks to strong performances in long-term loss and general loss insurance.
The outlook for this year is positive, with economy expected to enter recovery mode and the insurance industry tending to move in line with economic cycles.
But there are a number of issues that the industry must deal with. The biggest concern of non-life groups here is how to deal with the soaring loss ratio in auto insurance.
Auto policies represent some 30 percent of non-life insurance businesses. Such products had a hard time last year due to sluggish sales of new vehicles, a slowdown in car registration and cutthroat competition to cut premiums amid expansion of the online market.
On top of that, the loss ratio added to their burden. The ratio of insurance money paid to subscribers compared with their insurance premium income is seen as the barometer for companies' profitability.
The figure marked 82.8 percent last December, the highest ever since November 2006 and far higher than the 70 percent which non-life insurance companies consider the break-even point. Some small-sized players saw their ratio surpass 90 percent.
There were temporary factors, including heavy snow, behind the surging loss ratio, but it isn't likely to go down quickly as traffic is increasing amid the economic recovery. Repeated presidential pardoning of traffic offenders is also adding to the surging loss ratio. Automobile maintenance businesses' request that they should be paid more by insurers is another concern.
However, it isn't easy for firms to raise premiums as the government is strongly opposed to such action.
"As auto insurances are sensitive to the economy, it is crucial to stabilize the loss ratio. In the future, however, the loss ratio is likely to worsen," said Lee Jin-myon, director and research fellow at Korea Insurance Research Institute.
Companies are also actively looking for new growth engines this year. "Non-life insurance groups were at a disadvantage last year as they were made to provide the same coverage for medical policies compared with life insurers," a spokesperson at the General Insurance Association of Korea said.
Medical Policies Gaining Popularity
Non-life insurers' medical policies were more popular as these products fully covered medical expenses incurred, while similar plans from life insurance firms only cover up to 80 percent. However, the financial regulator determined that they should lower the coverage to 90 percent of the total expenses.
"This year, non-life insurers are focusing on developing general insurance products that don't overlap with life companies' portfolio. This includes fire, marine and accident insurance," the representative said, adding that also under the spotlight is casualty insurance.
Another analyst expects long-term insurance to continue growth as baby-boomers ― who led industrialization and accumulated wealth to back up demand for high quality health services ― begin to retire. "Amid a rapidly aging society, national health spending isn't satisfying people's demand on medical services. Hence, the demand for long-term insurance will continue and is expected to grow by 12.5 percent in 2010," said LIG Investment & Securities analyst Ji Tae-hyun.
Nonghyup, or the National Agricultural Cooperative Foundation, is also a big threat to non-life insurance companies. Nonghyup already has a big presence in the insurance market, with its total assets exceeding those of Samsung Fire & Marine Insurance.
Nonghyup is demanding that it should continue to be exempted from various regulations such as bancassurance even if it comes under the Insurance Business Law. As it was exempt from the law which states that the products of one company should not exceed 25 percent of the bank's sales portfolio when a bank sells insurance products through bancassurance, Nonghyup has sold its own insurance products through its nationwide channel.
"Nonghyup is powerful in rural communities. They may force loan seekers to subscribe to policies in exchange for extending loans," a spokesperson for a non-life insurance company said.
Non-life groups are making efforts to strengthen consumer protection this year. The financial regulator has already strengthened regulations on insurance advertisements.
"Insurers should enhance consumers' trust in them. Trust in the industry has been faltering upon growing irregularities in the sales process, following reckless expansion of the sales force and segregation between product and sales," said Korea Insurance Research Institute 's Lee.
He advised that the insurance industry establish their own ethics and market rules, and teach these to salespeople. Social contribution activities can also help improve people's impression of the insurance industry, he added.