This Q&A with Changwon Im, a professor in the department of Statistics and Actuarial at Soongsil University and chair of the Insurance Accounting Committee, explores developments in Korea’s insurance market. He discusses recent regulation changes, potential opportunities and challenges in the future.
It is our honor to invite you to share your experience with our audience. Could you tell us a bit about yourself?
I have been a member of the Institute of Actuaries of Korea since 1991, and I have been teaching actuarial science at Soongsil University based in Seoul since 2019. Before Soongsil University, I served as a chief financial officer or a chief actuary for about 30 years for a few life insurance companies in Seoul, including AIA, AVIVA, PCA and Manulife.
Customers are always the key, no matter what business. So, could you share the current demographic and customer trends in Korea?
The population of Korea is more than 52 million people, and it is aging at an unprecedented rate due to its low birth rate and high life expectancy. In the insurance market in Korea, the older generation is a relatively large population who are not familiar with the digital environment and are interested in health insurance and retirement income. In contrast, the younger generation is a relatively small population who are very familiar with the digital environment.
In 2020, the insurance penetration ratio for Korea was about 11.6%, ranking sixth in the world. This is in comparison to the global insurance penetration ratio of 7.4%. The insurance penetration ratios for life and nonlife were 6.4% and 5.2%, respectively.
An aging society is an issue in many advanced countries. What are the primary products sold in the market in the current environment? What are the leading platforms and channels in the industry?
Life insurers provide a wide range of protection products, universal type savings products, individual annuity products and corporate pension plans. Group life and group health products are also sold, but the market is limited. Protection products include traditional or universal whole-life products, and some are sold as long-term saving plans using the lapse-supported product feature. Many health products are widely sold as a base plan or as a rider attached to the whole-life plan, including critical illness coverage, long-term care, hospitalization benefits and medical expense reimbursement plans.
Life insurers rely on three major distribution channels to offer their individual products. Bancassurance is the key channel for the individual annuity and universal savings products. The tied agent and independence agent channels sell protection and savings products. Corporate pension plans are sold using the insurers’ direct sales employees, and a few small players are using internet and telemarketing channels for simple protection and annuity products.
Nonlife insurers provide a wide range of general insurance coverage, including automobile, marine, guarantee and casualty. Most nonlife insurers in Korea provide long-term insurance contracts for individual customers, covering a wide range of risks as a rider, including medical expense reimbursement benefits, other health coverage and nonlife coverage. They also provide tax-qualified annuity products and corporate pension plans.
Nonlife insurers rely on two major channels—tied agent and independent agent—to offer their protection products: automobile insurance, long-term insurance and nonlife insurance coverage. A significant volume of automobile insurance is sold through the online channel. Bancassurance is used to sell some health insurance products, but its contribution is not significant. Individual annuity products are sold through the bancassurance and agency channels. Corporate pension plans are sold using the insurers’ direct sales employees.
Who are the major players in the Korean insurance market?
There are 24 life insurers in Korea, comprising 15 domestic and nine foreign players. The top three life insurers are Samsung Life, Hanwha Life and Kyobo Life, and their market share for the year 2020 was 46.5% in premium income. Four life insurers are listed on the stock market: Tongyang Life, Hanwha Life, Samsung Life and Mirae-asset Life. Their market share for the same year was 45.2%.
There are 21 nonlife insurers in Korea, consisting of 13 domestic and eight foreign players. The top four nonlife insurers are Samsung Fire, Hyundai Marine, DB General and KB General, and their market share in 2020 was 68.5% in premium income. Seven nonlife insurers are listed on the stock market, and their market share for the same year was 87.4%.
There are 10 reinsurers in Korea, consisting of one domestic and nine foreign players. KoreanRe is listed on the stock market as the only domestic reinsurance player in Korea.
Are there any recent regulatory or compliance changes that heavily affect the insurance market in Korea?
The central issues for the insurance market in Korea are implementing the new accounting standard and the capital standard. The industry’s key concerns are the financial impact and operational readiness for the new standards. The potential volatility of their financial position, coupled with the recent unstable capital market environments, has become a central issue.
The new accounting standard International Financial Reporting Standard (IFRS) 17 goes into effect on Jan. 1, 2023, in Korea, which applies to all the insurers in Korea, regardless of size and type of business. The insurance industry has used many resources over the last five years to prepare to implement the new standard. The new accounting standard is expected to affect the insurance industry significantly in all aspects of financial and risk management. IFRS 17 is far different from the existing IFRS 4 standard in valuation methodology and profit recognition. The current standard IFRS 4 in Korea is based on the traditional net premium reserve, the account value and the explicit deferred acquisition cost. In contrast, the new standard IFRS 17 is characterized by the current estimates with explicit risk adjustments and profit recognition through contract service margin.
On the other hand, the Financial Supervisory Service will introduce a new Statutory Accounting Standard at the same time, which is expected to be equivalent to IFRS 17 with a few minor exceptions. Other relevant regulations, including taxation and policyholder dividend system, are also being amended accordingly.
As mentioned, a new capital standard becomes effective beginning Jan. 1, 2023, which is aligned with the implementation of the new accounting standard IFRS 17. It is called “Korean Insurance Capital Standard” and replaces the existing “RBC system.” Its structure is similar to the EU’s Solvency II and the International Association of Insurance Supervisors (IAIS) Insurance Capital Standard (ICS). This change will allow insurers to make more consistent and reasonable business decisions. However, it will be a big challenge to prepare the system and process for this new requirement with little outlay of time and resources.
Have there been any recent insurance innovations or technology shifts in the Korean market?
The revolution in information technology, which has been observed widely in the country, is affecting the insurance market in Korea dramatically in all aspects of insurance services and operations.
More and more, insurers are providing online distribution channels to allow their customers to buy insurance products conveniently and comfortably. It is very common to buy automobile insurance policies through the online channels of nonlife insurance companies. Customers also can enjoy more favorable prices from the online channel compared to the traditional channel. Some life insurers also provide simple life products, health products and annuity products through online channels. A digital life insurer does not have any distribution channels other than the online channel to provide simple protection and annuity products.
Some insurers provide health care services to their existing and potential customers using wearable devices. These services are related to the activities for collecting the customers’ health-related information, finding a suitable insurance product solution for the customers and determining the level of premium discount. I also observed some cases of insurance service innovations using advanced technology, including customer counseling using artificial intelligence (AI), customer service using blockchain technology and prospecting customers using big data.
Technology companies with tremendous customer bases have increased their presence in the insurance industry. A messaging platform company obtained a preliminary license for a digital nonlife insurance business. Some have launched an independent agency platform to sell insurance by leveraging their customer base.
Besides the technology shift observed in the market, several significant events occurred in recent years. Could you share the COVID-19 and low interest rate impact on Korea and the lessons learned?
Korea has been reported as one of the most successful countries in responding to the COVID-19 pandemic. Korea managed the fatality rate at the lowest level globally, and its economy returned to the average level this year, earlier than any other country. However, the virus still mutates and evolves, so it is difficult to predict the potential impact on the economy and society of Korea in the future. Initially, a few insurance products covering COVID-19-related risks were launched, but the result was not impressive.
The low interest rate environment has continued for many years in Korea. Under such an environment, the insurance industry has suffered a negative interest spread over the years because of the high interest rate guarantee of their in-force businesses.
Some life insurers have substantial in-force policies with high interest rate guarantees. They are supposed to reflect the impact of the expected negative interest spread on their financial position at the transition of the new accounting standard IFRS 17. To prepare for the implementation of the new accounting standard and capital standard, the insurance industry has continued to reduce the minimum interest rate guarantee for long-term savings products.
On the other hand, the interest rate in Korea recently has increased significantly in response to the increase in U.S. rates. This significantly affects the insurers’ financial positions, and some life insurers suffer from a deterioration of capital position because the policy liabilities are not affected by the change in interest rates under the current capital standard. The higher interest rates in Korea will encourage life insurers to offer more attractive savings products.
What are the potential challenges and opportunities you think Korea’s insurance industry will face in the future?
The Korean economy is strong enough to allow us to expect the insurance industry’s growth to continue. A rapidly aging population increases the need for attractive retirement plans and health insurance products to live healthy lives after retirement. Many baby boomers have already retired or are approaching retirement age. This is a great opportunity for insurers in Korea, but they are competing with other financial service providers, including mutual funds.
The working-age population has decreased because of the low birth rate in Korea. This could be a challenge for the life insurers willing to grow in the life insurance market. However, it is well known that the protection gap between the actual death benefit covered by life insurance policies and the amount of death benefit required to protect their families has been huge. This is one of the opportunities for life insurers in Korea.
As mentioned, the new accounting and capital standards are challenging for the insurance industry because of the complexity and difficulty in implementation. The implementation cost would be significant, and the ongoing cost of complying with the standards would increase significantly. However, these new standards will significantly enhance the transparency of the financial position and performance of the insurers, so they can make good business decisions based on the information to deliver an excellent business result. This could be a good opportunity for the insurers to differentiate themselves and enjoy sustainable growth in Korea.
Do you have any advice for actuaries interested in moving to Korea?
The Korean economy has delivered strong growth for several decades, and the insurance industry also has a great story of growth over the same time period. The Korean insurance industry faces a new growth opportunity under a dynamic business environment, including the globalized accounting and capital standards and the rapid evolution of information technology. The demand for actuarial professionals is increasing in Korea. It has been proven that the new accounting and capital standards require much more sophisticated actuarial skills and knowledge in data analysis, model construction and other actuarial work. Korea also is regarded well in many aspects, including culture, music, movie, sports, language and public safety.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.
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