Increasing losses and intense competition in the automobile and long-term insurance lines, as well as rising interest obligations, may pressure the Korean non-life insurance sector’s overall profitability, says AM Best.
Nevertheless, the global credit rating agency is maintaining a stable market segment outlook on South Korea’s non-life insurance market.
A new Best’s Market Segment Report, titled, “Market Segment Outlook: South Korea Non-Life Insurance”, states that supporting the stable outlook are broadly stable market dynamics, despite slowing growth and declining underwriting profitability in automobile and long-term insurance lines.
The potential for relief on underwriting pressure should the automobile pricing cycle harden and competition in the long-term insurance line cool, and an overall positive bottom line supported by a continuous stream of net investment profits also are factors in the outlook.
Declining sales of long-term savings type products, as well as stagnant economic growth and direct and indirect regulatory restrictions on insurance pricing, have pressured the industry’s top line. The non-life market’s gross premiums written (GPW) grew by 4.0% during the first half of 2019 and by 2.0% in 2018, down from relatively higher growth in previous years.
In addition to subdued top-line growth, South Korean non-life insurers have had to grapple with underwriting pressure. Larger insurance companies have been able to manage underwriting volatility and partly mitigated the challenges from underwriting deterioration. However, smaller players were hit harder, and their bottom lines experienced steeper declines in 2018.
The industry automobile loss ratio rose to 86.5 in 2018 from 80.7 in 2017, and the trend has worsened, with the automobile loss ratio rising to 87.5 in the first half of 2019, versus 81.6 during the same period in 2018. To mitigate the rising loss ratio, most South Korean non-life insurers raised their automobile premium rates twice in 2019. AM Best believes that the two rate hikes, as well as various efforts by the insurers to improve profitability, will lead to a more stabilised automobile loss ratio in 2020.
On the other hand, the overall expense ratio has seen a sharp rise over the last five years to 22.5% in the first half of 2019 from 18.5% in 2014, mainly driven by the accelerated competition within the long-term insurance line, particularly when it comes to distribution via the general agency channel.
South Korean non-life insurers, like their life counterparts, are highly dependent on investment yield from their substantial volume of long-term savings premiums as a main income source. Despite the decline in yields owing to the prolonged low interest rate environment, the expanding volume of total invested assets has led to an overall increase in investment profits, which has helped offset the recent pressure on the market’s underwriting performance.