The outlook for South Korea’s non-life insurance market remains stable, according to AM Best, but increasing losses and intense competition in the automobile and long-term insurance lines, as well as rising interest obligations, may put pressure on the sector’s overall profitability.
According to a report by the international insurance credit ratings agency, the outlook for South Korea’s market is supported by its broadly stable market dynamics, despite slowing growth and declining underwriting profitability in the automobile and long-term insurance lines. The study also factored in the potential for relief on underwriting pressure should the automobile pricing cycle harden and competition in the long-term insurance line cool, as well as an overall positive bottom line supported by a continuous stream of net investment profits.
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Declining sales of long-term savings type products, as well as stagnant economic growth and direct and indirect regulatory restrictions on insurance pricing, are placing pressure on the industry’s top line, the report said. The non-life market’s gross premiums written grew 4.0% during the first half of 2019 and 2.0% in 2018, which is quite low compared to previous years. Furthermore, the South Korean non-life insurers had to contend with underwriting pressure. While larger insurers were able to manage underwriting volatility and partly mitigate the challenges from underwriting deterioration, smaller players were hit harder, with bottom lines experiencing steeper declines in 2018.
The industry’s 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, AM Best said.
To counteract the rising loss ratios, many South Korean non-life insurers hiked 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 stabilized automobile loss ratio in 2020,” the report said. “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.”
