South Korean insurers brace for profit squeeze amidst rate cuts

Direct premiums from long-term products contributed to a 3.7% increase in 2023.

South Korea’s non-life insurance sector is experiencing moderate expansion as non-life insurers focus on securing future profits under IFRS 17 and adapting to regulatory changes aimed at improving profitability, AM Best said.

Growth in direct premiums, particularly from long-term personal line products like health insurance, contributed to a 3.7% increase year-on-year (YoY) in 2023.

The auto insurance segment faces slower growth due to recent rate cuts and weak vehicle registration figures. 

Rate adjustments in 2022 and 2023 helped maintain stable loss ratios, but additional rate cuts in early 2024 and lower vehicle demand are likely to moderate growth further in the coming year.

The simultaneous implementation of IFRS 17 and K-ICS is pushing insurers to prioritize long-term profitability, emphasizing contractual service margins (CSM) as a key metric in revenue projections. 

Non-life insurers are focusing on high-margin, long-term products, including senior and child care insurance, whilst managing assumptions like loss and lapse ratios to stabilize underwriting profits. 

However, intensified competition and potential downward pressures on premiums could impact profitability in the longer term.

In the current elevated interest rate environment, non-life insurers are expected to secure favourable returns from fixed-income investments, bolstered by recent policy rate adjustments from the Bank of Korea. 

Meanwhile, the global hard reinsurance market has had minimal impact on the sector due to South Korea’s low exposure to catastrophic events and smaller property and casualty portfolios.

To strengthen solvency, insurers are refining their asset and liability management strategies under K-ICS, including portfolio adjustments to mitigate interest rate risks and reinsurance utilization. 

AM Best expects these measures, along with the regulator's phased discount rate adjustments, to help non-life insurers maintain stability whilst navigating regulatory and economic challenges.