|Strengths||Risks and weaknesses|
|High operational barriers for new entrants||Financial burden from legacy high-yield guarantee policies|
|Evolving regulatory framework||Low interest rates and potential market volatility pressurizing investment returns|
|Korea's diversified economy fosters economic resilience||Low growth prospects|
S&P Global Ratings considers the life insurance sector in Korea as having intermediate industry and country risk assessment (IICRA). The sector's moderately high industry risk is mitigated by low country risk for Korea (AA/Stable/A-1+).
We view the sector trend as negative because we see increasing pressures on profitability for life insurers amid heightened financial market volatility due to the COVID-19 pandemic. In particular, we expect the legacy high yield fixed rate guarantee policies to increase the financial burden amid persistently low interest rates.
In our view, the Korea life insurance sector's low growth prospects indicate its matured status. Life insurers' shift toward protection policies that generate higher long-term value will likely continue.
We expect the regulatory framework for life insurers in Korea to continue to evolve to comply with the new accounting principles and capital framework although the global adoption of International Financial Reporting Standard (IFRS) 17 has been postponed again by one year, to 2023.
The overall assessment of Korea's life insurance sector is comparable with that of Japan and Germany.
Country Risk: Low
We expect Korea's economy to stay relatively resilient in the global context despite our estimate that GDP will shrink in 2020 due to the COVID-19 pandemic. We anticipate a recovery next year supported by a rebound in global demand and the government's fiscal stimulus and market-stabilization measures.
Korea has had a consistently good fiscal performance and relatively low net indebtedness. While the economy is exposed to security risks associated with North Korea--and conflicts have escalated at time--Korea's established institutional framework helps it to manage potential geopolitical risks.
Korea's banking regulation and supervision are generally in line with international standards. The legal framework is predictable and supportive of creditor rights. Creditors generally are able to recover collateral without inordinate delays in the event of foreclosures.
|Republic of Korea Sovereign Risk Indicators--Economic Data|
|--Year ended Dec. 31--|
|Real GDP growth (%, year-over-year)||2.8||2.9||3.2||2.7||2.0||(1.5)||4.0|
|Consumer price index (% change)||0.7||1.0||1.9||1.5||0.4||(0.1)||0.2|
|Policy rate (%, year end)||1.5||1.3||1.5||1.8||1.3||0.3||0.3|
|Unemployment rate (%, year average)||3.6||3.7||3.7||3.8||3.8||4.6||4.3|
|f--Forecast. Source: S&P Global Ratings.|
Industry Risk: Moderately High
We assess the life insurance sector's profitability prospects as weak with return on average assets of around 0.3%. This is primarily due to continuing pressure from legacy high-yield fixed rate guarantee policies amid persistently low interest rates. The Bank of Korea lowered its policy rate by 25 basis point to 0.50% in May 2020, following a 50 basis point cut in March 2020.
Premium growth for Korean life insurers will likely be low, given the matured market. These insurers are shifting their product mix toward protection policies to enhance their profit margins. Protection-type premiums accounted for about 90% of the life insurers' new business sales in 2019. We see these changes as part of insurers' efforts to prepare for IFRS 17 that scheduled to be adopted from 2023.
Korea has an established regulatory framework to supervise the insurance sector. The operational barriers are high for new entrants, in our view. They need to establish strong distribution channels--particularly individual tied agents (who exclusively sell the policies of a particular insurance company) and general agencies. In our view, these channels are difficult to establish and are costly.
Factors supporting profitability
- Limited new entrants within the Korean life insurance sector will keep the competitive landscape largely unchanged. High costs associated with establishing distribution channels will deter new joiners, aiding the dominance of key market participants. The top-three life insurers--Samsung Life Insurance Co. Ltd., Hanwha Life Insurance Co. Ltd., and Kyobo Life Insurance Co. Ltd.--had approximately 60% market share in premiums in 2019. The sector had only a few new entrants over the past decade. They include an annuity-specialized insurance company and an internet-based life insurance company, both of which have a very small market presence. While we consider the Korean regulator's approval process for new insurance licenses to be rigorous, the regulations do not explicitly limit new market entrants.
- We expect Korean life insurers to continue to focus on protection policies with limited investment guarantees. This would generate better value in the mid- to long-term, benefitting life insurers' capitalization. We project a modest (about 2% annually) growth in premiums in 2021- 2022. We anticipate a marginal growth in premiums in 2020, down from about 6% growth in 2019. This reflects a decline in face-to-face sales by agents due to COVID-19-imposed social distancing measures. Furthermore, reduced growth in household income also limits the propensity of individuals acquiring insurance coverage, in our view.
- Korea's regulators provide good supervision over the insurance sector with no evident deficiencies in governance and transparency. We expect the regulatory framework to continue to evolve along with the adoption of IFRS 17 from 2023. The financial regulator plans to introduce a new capital framework, Korean-Insurance Capital Standard, which better aligns with IFRS 17 and international standards (e.g., European solvency II). Under IFRS 17, insurers will need to report the market value for their insurance liabilities, which will move in tandem with the market interest rates. In our view, while the new accounting standards enhance the sector's focus on asset and lability management, they introduce more volatility in insurers' capitalization. The persistently low interest rates will also likely result in higher provisioning of loss reserves. We anticipate compliance and operational costs to increase for Korean insurers because new accounting systems and financial management rules will be required.
Factors limiting profitability
- Risk of negative interest rate spreads remains high for major Korean life insurers, increasing the financial burden amid persistently low interest rates. We estimate insurance policies with more than 5% fixed rate guarantee represent approximately 30% of the total reserves of life insurers in Korea as of December 2019. These policies were largely sold during the 1990s and early 2000s. While it will take a long time for life insurers to fully resolve the financial burden of the legacy policies, we expect insurers' focus on selling protection-type policies with low investment guarantees to help overcome such challenges. The regulatory initiative to introduce co-insurance--which allows primary insurers to transfer not only insurance risk but also other types of risk such as interest rates risk to reinsurers--could help restructure life insurers' legacy portfolio. However, the costs could be high, in our view.
- Low interest rates will put pressure on Korean life insurers' prospective investment returns and increase reinvestment risks. Weaker economic growth and rising financial market volatility could also result in higher credit losses this year in less liquid investment assets such as loans or securities with alternative investment features. These investments represent about 30% of the total investment assets as of December 2019. We anticipate life insurers will gradually increase their allocation to overseas bonds, mainly to boost asset duration while also seeking higher investment yields. This follows proposed regulatory changes to raise the overseas investment limit to 50% of the total invested assets, from 30%, based on the general account, effective in the fourth quarter of 2020. While the foreign currency exposure to these bonds are largely hedged, an increase in hedging costs especially amid heightened financial market volatility could pressurize their investment returns. The portion of overseas investments, mainly consisting of high-quality bonds, has increased to about 15% of total invested assets as of end-2019, from about 5% as of end-2013.
- Insurers Rating Methodology, July 1, 2019
- Banking Industry Country Risk Assessment: Korea, June 1, 2020
- Republic of Korea 'AA/A-1+' Ratings Affirmed; Outlook Stable, April 21, 2020
- COVID-19 Will Test Insurers' Resilience, March 25, 2020
This report does not constitute a rating action.
|Primary Credit Analyst:||Daehyun Kim, CFA, Hong Kong (852) 2533-3508 ;|
|Secondary Contacts:||Eunice Tan, Hong Kong (852) 2533-3553;|
|Emily Yi, Hong Kong (852) 2532-8091;|
|Scott Han, CFA, Hong Kong (852) 2532-8022;|
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