South Korean financial groups are facing increasing pressure from the underperformance of their insurance subsidiaries, a trend that threatens to dampen overall profitability despite record earnings in other sectors. While the holding companies themselves have achieved record profits, the insurance arms are no longer functioning as the growth engines they once were, according to market observers.
The shift is driven by a confluence of factors, including rising loss ratios, regulatory changes impacting future earnings projections, and sluggish new sales. A strong equity market rally is also diverting consumer funds away from insurance products, exacerbating the challenges faced by insurers.
KB Financial Group provides a clear illustration of this trend. Its non-life insurer, KB Insurance, reported a net profit of 778.2 billion won ($530 million) in , a decrease of 5.3 percent compared to the previous year. KB Life also saw a decline, with net income falling 9.4 percent to 244 billion won. Shinhan Financial Group’s Shinhan Life experienced a 3.9 percent drop in net profit, reaching 507.7 billion won, while Shinhan EZ Insurance recorded a net loss of 32.3 billion won.
Woori Financial Group’s Tongyang Life saw a particularly sharp decline, with net profit plummeting 60.5 percent to 124 billion won. Hana Financial Group’s Hana Life was an exception, managing to turn a profit with a net income of 15.2 billion won, though this represents a modest recovery.
Despite these struggles within the insurance sector, the combined net profit of the four major financial groups – KB, Shinhan, Woori, and Hana – reached a record 17.9 trillion won in , an increase of 9.8 percent year-on-year. This highlights the divergence between the performance of the core financial businesses and their insurance subsidiaries.
The rising loss ratios are a significant concern for insurers. These ratios reflect the proportion of premiums paid out as claims, and an increase indicates that insurers are paying out more in claims relative to the premiums they collect. This can be driven by a variety of factors, including increased frequency or severity of claims, or changes in the types of risks being insured.
Regulatory shifts are also playing a role. Changes in accounting standards and regulations are forcing insurers to revise their projections of future earnings, leading to an increase in loss-making contracts and tax-related expenses. The implementation of IFRS 17, a new international accounting standard for insurance contracts, is expected to further squeeze capital for Korean insurers, according to reports.
The competitive landscape is also intensifying, with insurers facing pressure to tighten pricing, control claims, and improve risk management. S&P Global Ratings anticipates that higher medical costs will particularly pressure profits, requiring insurers to adapt their strategies.
The slowdown in new sales is another contributing factor. The strong performance of the equity market has attracted investors away from insurance products, making it more difficult for insurers to attract new customers. A lack of successful new products has further compounded this challenge.
The situation is particularly challenging for Islamic insurers in the Gulf Cooperation Council (GCC) region, which are also experiencing growth but facing a potential profit squeeze in , according to S&P. This suggests that the pressures facing insurers are not limited to South Korea but are a broader global trend.
An industry official, speaking on the condition of anonymity, stated that the insurance subsidiaries are no longer a strong growth driver.
This sentiment underscores the changing dynamics within the South Korean financial sector and the need for insurers to adapt to a more challenging environment.
Looking ahead, Korean insurers will need to focus on improving their underwriting performance, controlling costs, and developing innovative products to regain their position as growth drivers for their financial groups. The ability to effectively manage risk and adapt to changing market conditions will be crucial for success in the years to come.
