Korean insurers under increasing pressure after record-breaking H1 profits

Samsung Fire & Marine Insurance Co.’s office building. [Courtesy of Samsung Fire & Marine Insurance]

South Korean insurance companies are under increasing pressure to extend their community outreach efforts and consider reducing insurance premiums after their remarkable profit generation, which can rival the earnings of the nation’s top five banks during the first half of this year.

According to financial industry sources on Wednesday, the consolidated net profit of both non-life and life insurers for the first half of the year soared to around 8 trillion won ($5.98 billion), setting a new record for the industry’s performance. Non-life insurers collectively achieved a net profit of 4.6 trillion won, while life insurers contributed 3.4 trillion won. Astonishingly, this profit level surpasses the combined net profit of the leading five banks by a small margin.

“Insurance companies, often considered second-tier financial institutions, have historically lagged behind card companies and securities firms in terms of net profits due to their revenue generation through insurance product sales. This marks the first time they have outpaced the combined net profit of the top five banks,” said an official from a non-life insurer.

However, amid this impressive financial performance, insurance companies continue to grapple with ongoing controversies concerning accounting manipulation. The introduction of the newly proposed accounting standard, IFRS 17, raises concerns that insurers might interpret it to serve their own interests, potentially resulting in accounting manipulation.

Some insurers are trying to apply the “retrospective method” to their financial statements, rather than the “prospective method” that financial authorities believe should be used when implementing IFRS17 guidelines, raising the possibility of accounting manipulation.

The prospective method recognizes the full effect of the accounting change in profit or loss in the current year and subsequent periods, while the retrospective method reduces the impact in the current period by applying the accounting change to past financial statements.

“This is the first year that the new accounting standard has been applied in earnest, and we are puzzled that the first half results are so good,” said an official from a life insurance company. “Frankly speaking, the insurance business environment has not improved at all, compared with last year.”

It is also pointed out that unlike banks and card companies, which are almost forced to make social contributions under pressure from financial authorities, insurers with top five bank-level performance are criticized for their relatively lackluster efforts in contributing to society.

The banking sector has decided to carry out more than 10 trillion won in social contribution projects in three years, starting from this year. Banks came up with financial support measures, including special loan products for the vulnerable, in response to calls by Financial Supervisory Service Governor Lee Bok-hyun. Card companies also announced a 1.8 trillion won win-win financing plan to support small businesses and vulnerable borrowers.

In the case of insurers, however, Hanwha Life Insurance Co. is almost the only one to launch the “2030 Stepping Stone Savings Insurance” and there is nothing to boast of as a win-win financial support measure at the industry level.

Insurers claim to be engaged in win-win financial activities through their social contribution committees, but this is in contrast to banks and card companies, which are offering large-scale support measures in addition to their existing social contributions, according to the financial sector.

As insurers’ support for win-win financing is low, financial authorities is expected to increase pressure on them to reduce auto insurance premiums and launch special insurance products for the vulnerable.

This is because despite challenges such as typhoons and heavy rainfall this year, insurers have maintained a favorable auto insurance loss ratio. The loss ratio for auto insurance among seven major non-life insurers, including Samsung Fire & Marine Insurance Co., remained in the 70 percent range during the first half of this year. Considering operational expenses, the non-life insurance industry considers the break-even loss ratio for auto insurance to be in the 80 percent range, indicating the potential for further reductions in auto insurance premiums in the latter half of the year, especially among large and medium-sized insurers.