South Korea's insurance industry's non-life insurance sector has had its market segment outlook revised to negative from stable due to the sector's deteriorated loss ratios in major business lines, escalated pressure on investment earnings amid a historic low interest rate environment and increased asset risk due to capital market volatility.
South Korea’s non-life insurance segment went through a difficult year in 2019, particularly in terms of underwriting performance. Despite a 4.8% growth in gross written premiums, overall industry net profit declined by 39.9% year on year, which followed a 20% decrease in 2018. The main cause of the poor results was the increased loss ratio for the automobile insurance segment and worse-than-expected profitability in the long-term insurance line.
Against a backdrop of falling interest rates, especially after the central bank’s sharp 50 basis point-cut of the base interest rate to 0.75% in March, AM Best noted that non-life companies will face significant challenges in maintaining current investment spreads. Additionally, non-life insurers already face heightened asset risks through their investment exposure to industries that have been impacted directly by the COVID-19 pandemic.
AM Best is of the opinion that the overall underwriting performance of the non-life segment will continue to be under pressure for the next 12 months despite a recovering automobile insurance underwriting cycle following a series of premium hikes since 2019. It is also unlikely that the recent deterioration in profitability of the market’s biggest line of business—long-term insurance—will improve over the short term without more fundamental changes.
While the impact of COVID-19 on non-life insurance premium growth in the first quarter is anticipated to be minimal, a certain level of new business contraction will be inevitable as the situation continues for a while, AM Best said.