Insurers face major retooling

By Kim Tae-jong

Insurance companies are streamlining their operations to weather falling profits amid the prolonged economic slump.

Until recently, the insurance industry has been able to withstand short-term risks better than other financial industries such as banking and securities. Even during the financial crisis in 2008, many insurance companies did not lay off their employees in the belief that they were important to boosting sales.

But market insiders say that things have changed.

“The sense of crisis is starting to grow,” an official from a non-life insurance firm said, asking not to be named. “If the situation does not improve soon, we may see large-scale restructuring at insurance firms in an attempt to reduce costs.”

The insurance industry posted a net profit of 6.49 trillion won in the 2010 fiscal year between April 2010 to March 2011, but that figure dropped to 5.83 trillion won in the 2011 fiscal year and to 5.58 trillion won in the 2012 fiscal year. It further plunged to 3.58 trillion won in the 2013 fiscal year from April to December.

He said most insurance firms have also seen a drop in sales in the first three months of this year due to unfavorable market conditions such as new regulations on telemarketing.

After a series of data breaches at three credit card firms in January, the government temporarily banned financial firms from calling or sending text messages to customers for the purpose of chasing sales in order to prevent financial scams.

Insurance firms were less sensitive to economic conditions than firms in other financial industries; the long-term nature of their products prompted them to focus on long-term returns rather than quarterly performance.

Insurance firms are also large investors that typically have longer-term investment horizons and hold a relatively large part of their investments to maturity.

But recently, it seems that they have started to realize that it is time to prepare for the impeding impacts of the slump from the past several years and the upcoming era of low growth.

Market insiders think the situation is slightly getting better for non-life insurance firms as financial authorities have allowed them to increase auto insurance premiums by up to 14 percent to help them cope with falling profits. This will be the first price hike for such firms in four years.

On the other hand, life insurance firms may continue to struggle because they can’t find new, stable income sources amid the prolonged period of low interest rates.

“(Life) Insurance firms face difficulties due to the products that they have sold in the past when the interest rates were very high,” an official from a life insurance firm said. “To increase sales, they also sold a lot of savings products, which put significant pressure on them because there were few investment opportunities.”

To cope with the harsh market conditions, the nation’s two largest life insurance companies ― Samsung and Hanwha ― have started to accept applications for their volunteer retirement program.

Samsung Life will also reduce the number of workers by 1,000-1,500 out of current 6,500. This proposed reduction is the largest for the company since the Asian financial crisis in 1997.

The company’s net earnings for April to December 2012 were 586.3 billion won, the smallest since 2008 when the global financial crisis hit.

Hanwha Life has also started to accept applications for its voluntary retirement program from those who have worked for the firm for more than 20 years. It is currently reviewing the applications.

“We haven’t yet decided how many employees will leave the firm,” said an official from the firm. “As it is our first restructuring effort in five years, we are careful in our selection.”

The decisions of these leading insurance firms are expected to prompt other insurance firms to follow suit. In fact, many insurance firms find their senior employees to a big burden to their financial health due to their high salaries.

“By reducing the high costs in human resources, insurance firms will have more money for developing new products and attracting new customer groups through new channels such as the Internet,” an official from another a life insurance firm said.

Market insiders said restructuring is a preemptive measure for these firms in order to stay more competitive. It is different from massive restructuring, which is the last resort to reduce costs and ensure survival.

“The restructuring of major life insurance firms is not just to reduce costs but also to enhance efficiency in human resources,” said Shin Seung-hyun, an analyst at Hana Daetoo Securities. “After the restructuring efforts, they are expected to increase the number of new contracts for long-term insurance products and advance into overseas markets.”