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Review of the Korean Insurance Market in 2020

In 2020, the COVID-19 pandemic caused partial disruption to face-to-face marketing activities, but insurance market growth in Korea was faster than expected as government stimulus measures following the outbreak of COVID-19 provided a temporary boost to the market. However, this growth momentum is unlikely to last, with the impact of increased money supply being limited to boosting savings demand in the short-term rather than creating broader insurance demand in the long-term.

The insurance market showed a 4.3% increase in premium income to KRW 221.9 trillion in 2020, according to preliminary figures released by the Financial Supervisory Service. Life insurance premiums increased by 2% to KRW 119.6 trillion on the back of savings insurance. Non-life insurance premiums expanded by 7% to KRW 102.3 trillion, backed by growth in all lines of business. In particular, motor insurance premiums grew by 11.6% to KRW 17.5 trillion thanks to rate increases in 2019 and early 2020 and rapidly expanding online sales of motor insurance.

Premium Income
(Source: Financial Supervisory Service)

Improved underwriting performance allowed the insurance industry to deliver increased net income results. Insurers’ net income jumped by 13.9% to KRW 6,080.6 billion. Despite a decline in investment profit amid low interest rates, life insurers reported a 10.9% increase in net income, which totaled KRW 3,454.4 billion. Their underwriting losses narrowed due to improved business results from savings insurance and decreased reserving for guaranteed businesses, such as guaranteed minimum death benefits and annuity payouts.

Net Income
(Source: Financial Supervisory Service)

For non-life insurers as well, 2020 was a year of strong bottom-line growth, with net income soaring by 18.1% to KRW 2,626.2 billion. This improvement was largely driven by reduced loss ratios of motor and long-term insurance lines. One of the many knock-on effects of the COVID-19 pandemic has been a decrease in motor claims due to a reduced use of vehicles amid social distancing. There has also been a drop in outpatient visits to hospitals for non-urgent and elective medical treatments, which temporarily brought down the loss ratios of accident and health insurance.

(Source: Financial Supervisory Service)
Total Assets and Shareholders’ Equity
* Individual figures may not add up to the total shown due to rounding. (Source: Financial Supervisory Service)

In tandem with net income growth, the profitability indicators of the insurance industry also showed modest improvement in 2020. The return on assets (ROA) ratio of insurers inched up to 0.48%, while the return on equity (ROE) ratio increased to 4.45%. As of the end of 2020, total assets of the insurance industry rose by 6.6% year on year to KRW 1,321.2 trillion. Total shareholders’ equity of the insurance industry expanded by 10.1% to KRW 143.1 trillion, driven by an increase in retained earnings and mark-to-market gains on available-for-sale securities in a persistently low interest rate environment.

RBC Ratios of the Korean Insurance Industry as of December 2020

The average risk-based capital (RBC) ratio of insurance companies in Korea declined by 8.8%p quarter on quarter to 275.1% at the end of December 2020. Life insurance companies saw their average RBC ratio decrease by 6.1%p to 297.3%, while the ratio of non-life insurers went down by 13.5%p to 234.2%.

RBC Ratios of Insurers in Korea
(Source: Financial Supervisory Service)

Insurance companies showed a growth in other comprehensive income arising from stock price gains, although mark-to-market gains on bonds reduced due to an increase in interest rate. The yield on ten-year Korea Treasury rose to 1.71% at the end of December 2020 from 1.43% three months earlier. As a result, the amount of available capital increased by KRW 0.9 trillion to KRW 174.5 trillion as of December 31, 2020.

Meanwhile, insurers saw their required capital expand by KRW 2.2 trillion to KRW 63.4 trillion as credit and market risk amounts grew in line with increasing assets under management. The value of insurers’ assets under management increased to KRW 1,047.2 trillion at the end of the fourth quarter of 2020 from KRW 1,034.3 trillion three months before.

Solvency capital management has remained one of the biggest challenges for the insurance industry in Korea with the implementation of IFRS 17 scheduled for 2023 along with a new risk-based capital (RBC) regime called the Korean Insurance Capital Standards (K-ICS). Insurers have been exploring various options in terms of both capital requirements and available capital positions to boost their RBC ratios.

The RBC ratio is a key measure of how financially strong an insurer is, indicating its ability to absorb losses and pay insurance claims to policyholders. Insurers are required to maintain the ratio at 100% or above. The supervisory authorities monitor the RBC ratios of insurers, and in case of any signs of deterioration in the ratio, they will guide the financially weakening insurer to take proactive actions such as more rigorous stress testing and capital raising.

Changes in RBC Ratios of the Korean Insurance Industry
(Source: Financial Supervisory Service)

Review of Overseas Business Operations of Korean Insurance Companies in 2020

As of the end of 2020, ten insurers - three life insurers and seven non-life insurers - had 35 overseas business units in 11 countries around the world. Many of the overseas business operations of Korean insurers are based in Asia with five in China and four in Indonesia and Vietnam each. Outside Asia, there are nine units in the United States and three in the United Kingdom. In 2020, two branches were newly established - one in China by Korean Re and the other in Vietnam by Hanwha Life.

Overseas Business Operations of Korean Insurers (as of Year End)
(Source: Financial Supervisory Service)

By type of business, there are 27 insurance business operations, while five entities are operating as financial investment businesses. A subsidiary is the most common form of the overseas entities, with 24 subsidiaries and 11 branches. In addition to these subsidiaries and branches, there are 36 representative offices of Korean insurers in 12 jurisdictions around the globe.

Net Income of Overseas Business Operations of Korean Insurers (as of Year End)
(Source: Financial Supervisory Service)

In 2020, the Korean insurance industry saw their business results from overseas operations decline mostly due to the impact of COVID-19 on their business. Their net income decreased by 34.8% year on year to USD 45.6 million. Insurance business operations recorded USD 61.5 million in net income, down 14.5% from the previous year due to increased losses related to COVID-19. Financial investment operations remained in the red with a net loss of USD 15.9 million. Although the business results varied by country to country, operations in Asia showed relatively good performance.

Life insurers suffered setbacks on the face-to-face marketing front in the wake of COVID-19, and falling interest rates increased the value of the liabilities, putting greater strain on life insurers. Non-life insurers experienced a rise in loss ratios due to civil disorder events in the U.S. and natural catastrophes.

As of year-end, the total assets held by the overseas business units of Korean insurers increased by 2.2% to USD 5.41 billion, representing 0.7% of their total assets. Despite an increase in technical reserves of life insurers, the liabilities declined to USD 3 billion as non-life insurers experienced a drop in insurance claims payable. The amount of total equity jumped by 9.5% to USD 2.41 billion due to positive net income and additional capital injection for some entities.

Financial Position of Overseas Business Operations (as of Year End)
(Source: Financial Supervisory Service)

Initiatives to Make it Easier to Purchase Compulsory Fire Insurance

In Korea, the compulsory fire insurance requirement is imposed on property owners with regard to specified types of buildings, defined as special buildings, which are at risk of large fire losses such as third party death, bodily injury, and property damage caused by fire. Owners of special buildings are required to buy necessary insurance coverage under the Act on the Indemnification for Fire-Caused Loss and the Purchase of Insurance Policies.

Compulsory Fire Insurance Coverage Types and Limits
(Source: Financial Services Commission)

Under the compulsory fire insurance policy in Korea, the statutory third party liability limits are KRW 150 million per person for death and permanent disability, KRW 30 million for other bodily injury, and KRW 1 billion per event for damage to third party property.

The types of properties defined as special buildings include the following:

  • Commercial buildings with 11 stories or more
  • Apartment complexes with at least one building of 16 stories or more and others of 15 stories or less
  • Buildings where areas above 2,000 square meters are occupied by schools, department stores, restaurants, supermarkets, cinemas, subway stations etc.
  • Railway stations, malls, markets, hospitals, educational establishments, factories, public venues, broadcasting stations, accommodation facilities and hotels above 3,000 square meters in floor area
  • Government-owned buildings above 1,000 square meters in floor area
  • Indoor shooting ranges

The scope of special buildings has been expanded to increase the fire insurance take-up rate and to ensure that social safety net is strengthened against the risk of fire events. However, there are some special buildings that are left uninsured due to difficulties in obtaining relevant insurance coverage. As of late November 2020, about 7% of 50,747 special buildings or 3,623 buildings remained uninsured.

Most of all, property owners find it challenging and time-consuming to contact multiple insurance companies to figure out which insurers are willing to offer insurance coverage. Another challenge is that insurers try to avoid accepting some special buildings because they are considered to present extremely high risk. In particular, some chemical plants, waste recycling, and plastic manufacturing factories are declined by most insurers.

In response, the Financial Services Commission (FSC) is taking a set of measures to address those issues. First of all, it is working with the Korean Fire Protection Association (KFPA) to create and operate a search system for fire insurance applications through which insurers can access applications that have been declined by other insurers. In other words, when a prospective insurance buyer submits an application to a single insurer and that insurer declines to accept the application, other insurers may access the application information with the consent of the applicant and initiate their underwriting process to evaluate the risk. This will make it easier for insurance buyers to get the insurance coverage as required by law without the need to contact multiple insurers.

Secondly, the FSC approved a joint underwriting agreement between the KFPA and non-life insurers, which allows them to collectively underwrite high-risk businesses to provide insurance to those who may have difficulty obtaining coverage from the standard market. Under this agreement, any applications that have not been accepted through the search system will be automatically placed to the joint underwriting group.

Growth Trend of the Liability Insurance Market in Korea

The liability insurance market in Korea has been growing fast amid rising awareness of liability coverage and the government’s initiatives to introduce new compulsory insurance plans to reinforce protection of accident victims against the costs of recovering from an accident that someone else has caused. Traditionally, low demand for liability coverage mostly resulting from a lack of awareness prevented the market to grow and develop. However, there has been an uptick in demand recently 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 cyber breaches.

Trend of Liability Insurance Premiums (2016 - 2020)
*Individual figures may not add up to the total shown due to rounding. (Source: General Insurance Association of Korea)

There are three major lines of liability insurance, i.e. general liability, professional liability, and product liability. The liability insurance market was worth over KRW 1.1 trillion in terms of premium income as of late 2020, up 12% from the previous year. General liability premiums increased by 3.4% year on year to KRW 592.8 billion, representing 53% of the entire liability market. Professional liability and product liability premiums rose by 22% and 25.3%, respectively to KRW 297.5 billion and KRW 234.7 billion.

Breakdown of the Liability Insurance Market in 2020
(Source: General Insurance Association of Korea)
Liability Insurance Market Growth
(Source: General Insurance Association of Korea)

The demand for general liability is driven by a series of newly introduced compulsory liability insurance policies, including liability for owners of dangerous dogs in 2021, elevator operators’ liability, and cyber liability for a wide range of personal data-handling organizations in 2019. The scope of properties subject to compulsory man-made disaster liability insurance was expanded in 2020 to include public rental apartments and multi-family housing with 15 stories or lower. Discussion is also currently underway among government agencies regarding the need for compulsory insurance for users of electric kickboards or scooters due to an increasing number of road accidents involving such personal mobility devices.

The professional liability insurance market is also expected to grow continuously as the number of medical malpractice disputes has been rising, leading medical professionals to take greater interest in obtaining insurance coverage against malpractice claims.

In addition, legislative changes may boost demand for professional liability insurance. In September 2020, the Ministry of Justice announced new bills to propose the enactment of the Class Action Act that will expand the availability of class action suits to all industries as well as the amendment of the Commercial Act, which will allow for awards of punitive damages for intentional or grossly negligent conduct in all commercial causes of action irrespective of industry. Currently, class action lawsuits are allowed only in relation to certain areas including financial securities with regard to violations like false disclosure and unfair practices. When the proposed legislative bills are enacted into laws, the demand for directors and officers (D&O) liability insurance is expected to increase significantly.

As the market for professional liability insurance such as D&O coverage is largely affected by a changing social environment, demand is expected to keep growing in Korea alongside the strengthening of consumer rights and consumer protection measures. Shifting toward a litigious culture is another ongoing social development that may drive up demand for liability coverage.