Triple whammy weighs on local insurers

By Jhoo Dong-chan

The nation's insurers have been locked in a low-growth trap as triple challenges are weighing on their businesses.

Domestic insurers gained about a 201 trillion won ($1.69 billion) premium income to make Korea the world's seventh-largest country in terms of insurance market size last year. Of the nation's entire households, 98.4 percent have more than one insurance policy as of December.

Despite its seemingly solid market size, domestic insurers are entering crisis mode due to a decline in earnings, demographic changes and a new set of accounting standards.

According to the Financial Supervisory Service (FSS), the nation's non-life insurers suffered a 17.8 percent year-on-year decline in earnings in 2018. Last year's downtrend continued in the first quarter of the year since their net profit dipped 18.4 percent in the period compared to a year ago.

Disappointing earnings are cornering domestic life insurers as well. Their initial premium income totaled 10.9 trillion won last year, down 40.5 percent from three years ago.

“We don't have many options,” said a domestic non-life insurer official who asked not to be named.

“It's already a red-ocean market with its current low birthrate. In the meantime, financial authorities are introducing a series of measures strengthening related regulations. They are simply worsening the situation. All we can do at this point is shut down our branches across the country to cut opportunity costs.”

According to Statistics Korea, 98.4 percent of the nation's entire households already have more than one insurance policy as of December. This means it is now almost impossible to develop a new customer pool here at this point.

In a bid to overcome the nation's saturated insurance market, firms are looking for opportunities to enter overseas markets, but their efforts have yet to produce a desired outcome.

The FSS reported only three life insurers and seven non-life insurers have made inroads into overseas markets. Domestic insurers' total assets abroad totaled 5 trillion won, only 0.7 percent of their entire assets worth 777 trillion won.

This is in stark contrast to the global trend where big-name foreign insurers depend on overseas business for up to 40 percent of their entire earnings.

Adding fuel to the fire, domestic insurers are also required to increase their cash reserves before new accounting rules International Financial Reporting Standards (IFRS) 17 and K-Insurance Capital Standard (K-ICS) take effect in 2022.

The IFRS 17 is a new set of global accounting standards. Under the new accounting rules, insurers' payment liabilities will be measured based on market value, not book value, which could result to an increase in liabilities. The K-ICS would newly evaluate insurers' premium payment capability based on a weaker bottom line.