This year, an increase in the number of people visiting hospitals due to the flu outbreak in the first quarter has led to a sharp decline in the performance of major property and casualty insurers. There are concerns that the sensitivity of insurers' performance to external shocks such as the flu may increase, causing a larger drop in performance. This is because insurers have been competitively selling long-term insurance, which has a high potential for losses in the long term, to generate short-term revenue over the past 2 to 3 years.
According to the insurance industry on the 19th, the net profit for the first quarter of this year for four of the five major property and casualty insurers (Samsung Fire & Marine Insurance, Hyundai Marine & Fire Insurance, DB Insurance, and Meritz Fire & Marine Insurance) fell compared to the same period last year. Hyundai Marine & Fire Insurance saw the largest drop at 57.4%. DB Insurance declined by 23.4%, Samsung Fire & Marine Insurance by 13.2%, and Meritz Fire & Marine Insurance by 5.8%. KB Insurance was the only one of the five to grow, increasing by 8.2% to record 313.5 billion won.
All five insurers experienced a decline in their core insurance profit. Insurance profit is defined as the revenue from insurance minus the insurance service expenses. While all five major insurers saw an increase in revenue, costs such as paid claims increased even more significantly. In particular, the financial performance of long-term insurance deteriorated more than that of general insurance. This is why analyses suggest that the decrease in net profit is due not to internal factors like poor operations, but to external factors such as the flu and wildfires.
KB Insurance, which was the only one to see an increase in net profit, reported insurance profit of 236.1 billion won for the first quarter, a decrease of 28.6% compared to the same period last year. Meritz Fire & Marine Insurance, which was evaluated as having performed well, also saw its insurance profit decline by 21% to record 359.8 billion won during the same period. Hyundai Marine & Fire Insurance dropped by 67%, DB Insurance by 28.5%, and Samsung Fire & Marine Insurance by 6%.
Some predict that insurers' performance may fluctuate in response to external shocks. If large-scale reasons for insurance payouts such as disasters, calamities, or pandemics occur, it could lead to a more significant decline in performance than in the past.
The insurer concentrated on selling long-term insurance, which is favorable for the profitability indicator, Contractual Service Margin (CSM), due to the introduction of a new accounting system (IFRS 17). However, as competition intensified, insurers began to release products that lowered premiums while enhancing benefits. Using this strategy, most insurers achieved record performances last year. But if the number of claims increases, the loss ratio could soar.
Moreover, as the financial authorities required a conservative assumption for the termination rates of non-guaranteed and low-guaranteed insurance, which accounts for most long-term insurance, profitability deteriorated. A lower termination rate reduces the balance of CSM, the profitability indicator. Non-guaranteed and low-guaranteed insurance are products that pay little or no insurance money upon contract termination. The financial authorities determined that higher termination rates benefit insurers, but they believed that insurers inflated profits by estimating high termination rates.
These long-term insurance policies also complicate insurers' solvency indicators, such as the solvency ratio (KIC). The Financial Supervisory Service (FSS) explained that the decline in the solvency ratio of most insurers occurs due to a structure where the lower risk-adjusted revenue from selling long-term protection products for securing CSM increases the required capital, thus lowering the solvency ratio.
An industry insider noted, "In the early stages of implementing IFRS 17, we had to sell long-term insurance to secure CSM, and we aimed to increase sales even by lowering premiums," adding, "Reducing premiums like this could adversely affect future loss ratios."