Bo-eun leads the digital content team. She has covered foreign affairs, North Korea, tech, economy and gender issues at The Korea Times. She did a short stint at the South China Morning Post in Hong Kong, where she obtained a new perspective on news production and life. Small sources of joy for her are lounging in the sun, having a good latte and swimming.
INTERVIEW 'Gov't needs to allow various forms of co-insurance'
Korea Insurance Research Institute (KIRI) President Ahn Chul-kyung / Courtesy of KIRI
By Kim Bo-eun
KIRI chief warns of dominance of financial platform players
By Kim Bo-eun
Life insurance companies are moving quickly to transfer risks to reinsurers after the government allowed the operations of the co-insurance business a few months back.
Co-insurance was introduced to alleviate problems at local life insurers, many of which hold long-term contracts guaranteeing high, fixed rate returns. In a low interest rate world they now face reverse margins and the upcoming implementation of International Financial Reporting Standards (IFRS) 17 imposes an additional strain because they need to expand their capital base to meet these new financial health standards.
Korea Insurance Research Institute (KIRI) President Ahn Chul-kyung welcomes the introduction of the co-insurance system.
"Formerly, the only option insurers had in managing their capital was to increase the amount of capital they hold, but the system of co-insurance has enabled them to manage their insurance liabilities which is the root cause of the problem," he told The Korea Times in a recent interview.
But because Korea has introduced the system of co-insurance very recently, the government only allows principal insurers to transfer assets and liabilities to a reinsurer under the system.
Countries around the world adopt different systems. In Europe, principal insurers hold assets but hand over liability insurance to the reinsurer.
"In Japan, the government enables a broad spectrum of transactions in co-insurance. Korea also needs to allow various forms of co-insurance," Ahn said.
Japan's model can provide insight because Korean insurers share similarities with their Japanese counterparts of the 1990s, which faced the same circumstances of low interest rates and reverse margins.
"With the introduction of co-insurance, we also expect more diverse mechanisms in managing liabilities to be introduced," Ahn added.
Local life insurers
Return on investments have been falling for insurers as interest rates have been declining. The key rate was further cut to 0.5 percent in May amid the COVID-19 pandemic.
Insurers' rate of return on investments last year stood at an average of 3.55 percent. This creates a reverse margin considering insurers hold a bulk of policies guaranteeing a 5 percent to 6 percent return.
Insurers are estimated to suffer a 6 trillion won loss in reverse margins this year.
The IFRS 17, meanwhile, set to come into force in 2023, calculates insurance contract liabilities according to market value instead of book value. Under these rules, insurers need to secure a greater amount of capital to meet financial soundness standards.
Insurers were estimated to have to increase their capital by a combined 40 trillion won.
The co-insurance system is set to provide some breathing space for the firms.
Local entities are on the move to utilize the system. ABL Life Insurance is preparing to sign a co-insurance contract with the U.S. reinsurer RGA. Korean Re, which dominates the local reinsurance market, has partnered with the U.S. investment firm Carlyle Group, which holds capabilities in the insurance sector, to capture the new business opportunity.
Ahn noted that while Korean life insurers and those of Japan in the 1990s share similarities, differences exist as well.
A combination of factors including reverse margins drove seven mid-sized life insurer and one non-life insurer into bankruptcy between 1997 and 2001 in Japan.
"In Japan, insurers went bankrupt as debt accumulated amid the low interest rate environment that followed the asset bubble burst, under circumstances in which adequate capital requirements were not in place," he said.
"In Korea, capital requirements were introduced following the Asian Financial Crisis in 1997, and insurers changed their composition of assets and liabilities to better manage risks."
Digital era
Insurers have been among the most conservative players in the financial sector and are seen as slow to change. However, they now face tectonic shifts in the industry as new players emerge and increase their influence.
Digital players such as Hanwha's non-life insurer Carrot have emerged, offering innovative policies.
Digital insurers utilize online media such as mobile applications as their main channel to sell insurance policies. They have an advantage because they can reduce costs by not employing sales agents.
"Digital insurers have a higher dependence on data and IT in designing their policies and calculating premiums compared to existing insurers," Ahn said.
"This enables them to cover risks that existing insurers may forgo based on moral hazard issues, and they can also offer lower premiums than existing insurance companies with more sophisticated calculations of premiums."
He explained that without the data digital insurers have access to, existing insurers made decisions not to develop certain policies they estimate would cause them losses. Data, however, enables more accurate calculations and this expands coverage by insurers, Ahn said.
While Korea's digital insurance market is in its early stages, it is set to grow, based on the advantages of digital insurance, the president of the institute said.
Meanwhile, Ahn noted the role of sales agents will not be eliminated.
"Because insurance contracts have a longer duration and complexities compared to other financial products, there is a stricter requirement for insurers to provide necessary explanations. This in some cases makes non-face-to-face transactions difficult," he said.
Online platforms are also entering the insurance industry. Currently, such platforms such as Kakao Pay only serve as a sales channel, but they are preparing to develop and launch products as well.
Theses platforms possess enormous influence based on the traffic they attract.
"We can see new demand for insurance being created as well as possibilities for growth of the insurance industry, in a mobile-based environment that the young generation is familiar with," Ahn said.
"But financial platforms are highly likely to seek to dominate the industry with their influence on the market."
A case in point is Naver Financial, which is known to have called for insurers to pay hefty fees to have their policies sold via its channels.
"One entity, whether a financial platform or insurer, is unable to lead the insurance market. For the sustainable growth of the insurance industry, insurers and financial platforms need to work together," Ahn said.