Revised Insurance Market Outlook for 2021
The Korean insurance industry weathered the COVID-19 storm relatively well in 2020, but insurers are expected to see slower growth in 2021. The pandemic and resulting economic fallouts are causing long-term shifts in the insurance market landscape, and insurers are compelled to adapt to evolving market conditions and meet changing consumer needs and expectations. They are also encountering a set of challenges, ranging from ongoing economic uncertainty driven by COVID-19 to the prospect of new regulations such as tougher solvency and capital standards. Moreover, another abrupt downturn in economic output may hamper premium growth, putting further strain on the insurance market that is already struggling with weakening domestic demand.
The growth of the Korean insurance market is likely to slow to 3.1% in 2021, and the rate will be further down to 1.3% when the retirement annuity sector is excluded. Although economic recovery seems to be faster than expected, consumer spending remains largely sluggish, putting downward pressure on new business growth. As a result, insurers are expected to see a 2.1% decline in initial premiums excluding retirement annuities in 2021.
The life insurance market is expected to grow by 1.7% in 2021, with total premiums projected at KRW 121.7 trillion. When the retirement annuity sector is excluded, the amount of premium income is forecast to shrink by 1.4% to KRW 95.7 trillion. Sales of death covers will likely slow down due to declining demand and stronger supervision of mis-selling practices. As the COVID-19 crisis continues to drag on, depressed consumer confidence is becoming a downside factor in new business growth in the whole life segment, which has already been under strain from increasing market maturity. Strict social distancing measures are also causing setbacks for face-to-face distribution channels where a large portion of new life business is generated. Despite those challenges, protection life premiums are expected to increase by 3.6% in 2021.
General savings insurance is projected to decline by 6.5% mostly due to the base effect. Sales of variable savings insurance are growing, but rising surrender rates and decreasing in-force premiums will likely push overall variable savings premiums down by 4.9%. The increase in surrendered variable policies is associated with growing preference of consumers toward direct investment in the stock market, and this investing trend is likely to continue throughout the year. In addition, Bancassurance sales of variable life products will be adversely affected by a recent move by banks to strengthen their internal controls on how variable life products are sold.
The individual annuity market is expected to contract unless there is any increase in tax incentives. Although longer life expectancy may be the primary driver that boosts demand for annuity plans, an increase in individual life annuity supply will likely be limited due to the challenges of longevity risk management and stronger capital requirements under new accounting standards.
Non-life premium growth is projected to weaken to 4.8% in 2021 compared to 7% in 2020. When retirement annuities are not included, the market is expected to grow more slowly at 4.3%. Total premiums excluding retirement annuity are forecast to reach KRW 93 trillion, backed by long-term accident and health insurance as well as general property and casualty (P&C) insurance.
By line of business, the long-term non-life insurance market is expected to grow by 5.1% on the back of accident and health insurance. Continued inflows of in-force premiums are boosting the accident and health insurance sector, which is projected to grow by 8.6%. Long-term savings insurance premiums are set to decline further as insurers remain focused on marketing protection products. General P&C insurance will likely continue to maintain growth momentum thanks to the expansion of the casualty sector driven by liability, crop and mobile phone insurance. The marine insurance market will contract slightly due to the high base recorded in the previous year in the midst of rising trade flows and shipbuilding orders.
A sharp slowdown is expected for the motor insurance market, with premium growth slowing to 3.1% in 2021 compared to 11.6% in 2020, because the positive effect of price hikes mostly faded. The ongoing rise of online distribution channels usually offering lower prices is also putting downward pressure on premium income growth. However, the number of car purchases and registrations will continue to increase due to the extension of a temporary tax cut on purchases of passenger cars.
The retirement annuity market is poised to keep growing as demand for annuity products is rising, with the 65-and-over population expanding. In 2021, life insurers are expected to see a 15.3% growth in retirement annuity premiums on the back of an increase in funding requirements for defined benefit plans. In the non-life insurance sector, retirement annuity premiums are forecast to grow by 8.1% in 2021, backed by premiums from in-force policies.
The expansion of the individual retirement pension (IRP) sector is a positive force that drives the growth of the overall retirement annuity market. There are some negative conditions, on the other hand, that make for weak annuity sales, such as slowing wage growth and increasing unemployment amid the pandemic-driven economic weakness. Given that a large chunk of premium contributions are made at the end of the year, there is a higher level of uncertainty as to growth projections for the retirement annuity market.
Preliminary Business Results of Insurers in Korea for the First Quarter of 2021
Insurance companies in Korea experienced a big jump in net income for the first quarter of 2021. They reported KRW 3,872 billion in net income for the January to March period of this year, up 164.1% from the same period of the previous year. This higher than expected performance came amid improving loss ratios and rising interest rates and stock prices. There was also a one-off factor that boosted dividend income for major insurers, which contributed to overall industry net-income results.
Life insurers saw their net income more than triple to KRW 2,554.6 billion as underwriting losses sharply narrowed to KRW 4,715.3 billion. This improvement resulted mostly from guaranteed business reserve releases in the wake of increases in interest rates and stock market rallies. Samsung Life Insurance, the largest shareholder of Samsung Electronics, received special dividends of KRW 801.9 billion from the electronics company, and its net income for the first quarter more than quadrupled from a year earlier to KRW 1,088.1 billion.
Net income of non-life insurers soared by 91.5% to KRW 1,317.4 billion thanks to reduced underwriting losses, which reflected the high base in the first quarter of 2020 arising from significant losses from an explosion event at a local chemical plant. Motor claims remained low as the COVID-19 pandemic led to a decreased use of vehicles amid social distancing. Samsung Fire & Marine Insurance, the biggest non-life insurer in Korea, also benefited from the special dividend payments from Samsung Electronics, which amounted to KRW 140.1 billion.
In terms of top-line growth, insurers delivered stable performance with premium income increasing by 3.6% to KRW 52.5 trillion for the first three months of 2021. Life insurers' premium income rose by 4.5% to around KRW 28 trillion on the back of variable, savings and protection insurance. Premiums from variable insurance products soared by 15.2% in the midst of a booming stock market, while savings insurance premiums grew by 6.3% amid rising gaps between current interest-crediting rates on savings insurance and interest rates on bank deposits. Protection insurance also increased by 3.1%, but retirement annuity premiums declined by 10.1%. Non-life insurers reported KRW 24.5 trillion in premium income, up 2.5% year on year. General P&C insurance premiums increased by 8.5%, with motor and long-term premiums rising by 6.3% and 5.3%, respectively.
In line with net income growth, insurers' profitability ratios also improved, with the return on assets (ROA) ratio of the industry rising to 1.18% from 0.47%. The return on equity (ROE) ratio sharply went up to 11.19% from 4.57%. Non-life insurers reported higher ratios than life insurers as below:
Despite the revenue growth, insurers suffered decreases in assets and shareholder's equity due to a reduction in mark-to-market gains on available for sale securities. The total assets of insurance firms decreased by 0.5% year on year to KRW 1,314.6 trillion at the end of March 2021. They were broken down into KRW 970 trillion for life insurance and KRW 345 trillion for non-life insurance, with life insurers accounting for over 73% of the total industry assets. The total shareholders' equity of the insurance industry shrank to KRW 133.7 trillion, down 6.7%. Rising interest rates caused insurers to suffer a 22.6% decline in unrealized gains on the value of securities they hold as investments.
Increasing interest rates may help insurers improve their profitability in the long-term, but in the short-term, there is a dark side to the upward movement of rates. When rates go up, the value of insurers' bond portfolios goes down as existing bonds become less attractive than new bonds that offer relatively higher rates. Although this decrease in value does not affect net income because it is recognized as unrealized gains or losses, it diminishes insurers' book value or net worth.
RBC Ratios of the Korean Insurance Industry as of late March 2021
The average risk-based capital (RBC) ratio of insurance companies in Korea decreased by 19%p quarter on quarter to 256% at the end of March 2021. Life insurers saw their average RBC ratio decline by 24.1%p to 273.2%, while the ratio of non-life insurers went down by 9.2%p to 224.8%.
The primary reason for the decline was a reduction in accumulated other comprehensive income, which includes unrealized gains and losses reported in the equity section of the balance sheet. The yield on ten-year Korea Treasury increased from 1.71% at the end of December 2020 to 2.06% in late March 2021. Interest rate rises led to a decrease in unrealized gains on available for sale securities for most insurers, cutting into the book value of their shareholders' equity. As a result, the amount of available capital dwindled by KRW 11.1 trillion to KRW 163.4 trillion as of March 31, 2021. If it continues, this trend may be a problem for insurers with thin capital cushions.
Meanwhile, insurers saw their required capital expand by KRW 0.4 trillion to KRW 63.8 trillion as the credit risk amount grew in line with increases in alternative investments and loans. A growth in retained premiums also caused the insurance risk amount to rise, driving up capital requirements.
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.
Rise in Reinsurance Demand for General P&C Insurance
Non-life insurers in Korea are relying on reinsurance more than before in a bid to enhance their risk management. This trend of increasing reinsurance purchases is related to an increase in large-loss events over the last couple of years, such as a fire at Coupang's warehouse in June 2021 and an explosion at a Lotte Chemical plant in March 2020. Following a series of large losses, insurers have been increasingly compelled to buy more reinsurance to spread their risk of loss and avoid catastrophic exposures.
Ceded reinsurance premiums of ten major non-life primary insurers in Korea increased by over 4% to KRW 2,313.2 billion in the first quarter (Q1) of 2021 compared to the same period of 2020, representing more than 40% growth from Q1 2017. Over the past five years, the amount of premiums that they ceded to reinsurers has grown continuously from KRW 1,618.6 billion in Q1 2017, KRW 1,915.1 billion in Q1 2019, and KRW 2,215.7 billion in Q1 2020.
Smaller insurers tend to rely more on reinsurance than larger players, but recently bigger insurers showed greater increases in ceded premiums. Samsung Fire & Marine Insurance, the biggest non-life insurer in Korea, recorded the highest year-on-year rise of 15.5% to KRW 250.8 billion in Q1 2021, followed by DB Insurance (13.8%), Meritz Fire & Marine Insurance (8%) and Hyundai Marine & Fire Insurance (4.9%). This clearly demonstrates the extent to which non-life insurers rely on reinsurance has grown across the board.
Reinsurance demand is traditionally high for general property and casualty (P&C) lines of business because their loss volatility is significantly higher compared to other lines. Reinsurance is one of the most effective ways for P&C insurers to manage volatility in their underwriting results. In addition, many commercial risks are too big for a single insurer to bear alone, and it is practically impossible for insurers to provide sufficient coverage to large businesses without reinsurance capacity.
The growing reliance on reinsurance also reflects the growth of the general P&C insurance market. In 2020, general P&C insurance premiums grew by 8.3% to KRW 10,669.2 billion, surpassing the KRW 10 trillion mark for the first time in history. The market expanded by 20% over the past four years. The proportion of the general P&C sector also rose to 10.4% in 2020 from 9.6% in 2017. With this trend of market growth, demand for reinsurance is also expected to keep rising, as reinsurance can provide a crucial backstop for insurance companies against high-severity events.