|Strengths||Risks and weaknesses|
|High operational barriers for new entrants||Low interest rates, which pressurize investment returns|
|Relatively limited catastrophe exposure||Underwriting losses from medical indemnity and auto insurance policies|
|Evolving regulatory framework||Potential investment volatility due to large exposure to loans or securities with alternative investment features|
S&P Global Ratings considers the property and casualty (P/C) insurance sector in Korea as having intermediate insurance industry and country risk assessment (IICRA). The sector is exposed to moderately low industry risk while country risk for Korea (AA/Stable/A-1+) is low.
We expect Korea's P/C insurance sector to maintain its current level of profitability after some deterioration in recent years. Modest improvements in the loss-making auto and medical indemnity policies are likely. That said, persistently low interest rates will put some pressure on insurers' investment returns.
The regulatory framework for P/C insurers in Korea will likely continue to evolve to comply with the new accounting principles and capital framework although the global adoption of International Financial Reporting Standard (IFRS) 17 is postponed again by one year, to 2023.
The overall assessment of Korea's P/C insurance sector is comparable with that of Japan and Taiwan.
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 Low
We assess the Korean P/C insurance sector's profitability as satisfactory following insurers' continuing efforts to improve pricing adequacy on loss-making medical indemnity and auto insurance policies. However, persistently low interest rates could pressurize investment returns. We expect the return-on-average assets to be about 0.7% in 2020–2022. The sector's profitability had weakened in the past few years, mainly due to a deterioration in underwriting performances of medical indemnity and auto insurance policies.
We project gross premiums will grow 3%-4% annually in the next few years, partly supported by the hikes in premium rates. Korean P/C insurers have relatively limited catastrophe exposures and the operational barriers are high for new entrants, in our view. We believe the regulatory framework will evolve along with the preparation for IFRS 17.
Factors supporting profitability
- P/C insurers' underwriting performances will likely improve modestly backed by hikes in premium rates for the medical indemnity and auto insurance policies. We anticipate the underwriting performance for these lines in the first half of 2020 will also benefit from reduced claims amid social distancing, lower traffics, and individuals' postponement of elective medical procedures. We anticipate the overall combined ratio to be about 105% over the next two years, slightly down from 107% in 2019. Despite the expansion of the national health insurance scheme's medical coverage, policyholders sought costly and elective medical treatments covered by private sector insurers. This resulted in higher losses in medical indemnity policies in recent few years. Increasing auto repair costs also contributed to a rise in loss ratios. Medical indemnity and auto insurance policies accounted for approximately 20% each of gross premiums written in 2019.
- Korean P/C insurance's gross premiums will likely grow moderately at 3%-4% over the next two years. This is amid challenging operating conditions due to COVID-19, with social distancing measures and reduced face-to-face sales. Premium growth in 2020 will be partly supported by an about 10% hike in premium rates for medical indemnity and 3%-5% for auto insurance. We believe insurers will not take excessive risks to achieve high growth.
- We expect Korean P/C insurers to shift their product mix toward protection policies from savings policies. This shift, in tandem with preparations for IFRS 17, will help insurers to generate better value over the medium to long term. The majority of the long-term products sold by P/C insurers in Korea are either floating or limited fixed-rate guarantee products. The P/C insurers therefore maintain positive interest rate spreads.
- Korea's matured P/C insurance market has significant entry barriers for new entrants. In our view, the high degree of difficulty and the associated costs in establishing and building viable distribution networks, claims-handling infrastructure, brand recognition, and business relationships with retail and corporate clients pose challenges to newcomers. We believe the competitive dynamics within the P/C insurance sector will remain stable with the top four insurers accounting for approximately 70% of the gross premiums in 2019. The first internet-only P/C insurer, Carrot General Insurance, received a new license and started operations in early 2020. Carrot General Insurance is majority-owned by mid-tier P/C insurer, Hanwha General Insurance Co. Ltd. While we consider the Korean regulator's approval process for new insurance licenses to be rigorous, the regulations do not explicitly limit new entrants. A few new foreign insurers, including Allianz Global Corporate & Specialty and Asia Capital Reinsurance (ACR), have received regulatory approvals and opened branch offices in Korea in 2016-2017. However, ACR was acquired by Catalina Holdings (Bermuda) Ltd. and has been put in run-off.
- 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 market interest rates. While this will be challenging, we believe P/C insurers in Korea are better positioned to adopt IFRS 17 than the life insurers due to their limited legacy high-yield guarantee policies on the book. That said, the new accounting principles will likely introduce more volatility to insurers' capitalization and require higher provisioning of loss reserves amid persistently low interest rates. We anticipate compliance and operational costs will increase for Korean insurers because new accounting systems and financial management rules will be required.
Factors limiting profitability
- Low interest rates will put pressure on the insurers' prospective investment returns and increase reinvestment risks. Weaker economic growth and heightened financial market volatility in 2020 could also result in higher credit losses on less liquid investment assets such as loans or securities with alternative investment features. These investments represent about 40% of their total investment assets as of December 2019. We anticipate P/C insurers will gradually increase allocation to overseas bonds, mainly to boost asset durations 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 investment, 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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