Trend of Primary Insurers Reducing Retention in Commercial Insurance

The commercial insurance market in Korea has experienced significant growth in premium income over the last few years, with total gross premiums increasing by 13% to KRW 5,307.8 billion in 2022. Despite the growth trend in gross premiums, primary insurers have continued to reduce their retention in commercial insurance since 2018.

Commercial insurance refers to general property & casualty (P&C) insurance other than household general P&C insurance and motor insurance. It is designed to provide coverage for businesses against risks that may arise in relation to their business operations and threaten their financial stability. Unlike personal lines of insurance, commercial insurance is corporate insurance that is structured and negotiated to meet the needs of specific corporations or industries. It provides much higher limits of coverage than personal insurance because the sum insured is typically much higher.

There are five major lines of corporate insurance business: fire, marine, engineering, liability and comprehensive insurance. In 2022, comprehensive insurance took up the largest portion of the market, accounting for 43.7% of the total premium income, followed by liability (27.6%), marine (16.4%), engineering (8.3%), and fire (4.0%).

In 2022, most lines of commercial insurance showed strong growth, driven by rate increases and an uptick in demand due to increasing incidences of man-made disasters and growing interest in insurance covering the commercial sector against various business risks, such as negligence claims and data breaches. Engineering insurance stood out with the highest year-on-year growth rate of 20.6%, generating premiums of KRW 439.9 billion in 2022. Marine and comprehensive insurance also exhibited double-digit growth rates of 17.8% and 13.2%, respectively. On the other hand, fire insurance premiums grew modestly, with the fire coverage being increasingly packaged into comprehensive insurance.

In spite of gross premium growth, primary insurers have not increased their net premiums presumably because of high loss ratios. The retention rate in commercial insurance sharply dropped to 54.1% in 2022 from 58.3% in 2021. Over the last several years, insurers suffered a series of large losses such as fires at chemical plants and warehouses in Korea, leading loss ratios to increase. They have been taking a more cautious approach to capacity deployment, leading to the hardening of premium rates and the tightening of underwriting guidelines.

The retention rate indicates the portion of premiums that primary insurers keep for themselves after deducting the amount ceded to reinsurers. When the retention rate decreases, it means that primary insurers are transferring a larger share of premiums to reinsurers. This trend of falling retention rates has continued since 2018 when the rate was 62.8%.

Primary insurers are relying more on reinsurers to transfer a greater portion of the risks associated with the policies they underwrite because they can limit their exposure to large and potentially catastrophic losses, thereby reducing their own financial risk. In particular, commercial insurance policies may involve exposure to large-scale catastrophic events, such as natural disasters or major industrial accidents. The use of reinsurance can help primary insurers optimize their risk management strategies and ensure they can meet policyholder claims without compromising their own solvency.

Lower retention rates may stem from various other factors, such as competitive dynamics in the insurance market. Reinsurance allows primary insurers to access additional capacity to underwrite larger risks or take on more policies. This expanded capacity can be a competitive advantage, as it enables primary insurers to accommodate the needs of clients with higher coverage requirements or those seeking broader policy terms. By sharing risks with reinsurers, primary insurers can also experiment with new policy structures, extend coverage to emerging risks, or target niche markets.