Korean Insurers Stumble Amid Expansion Abroad

Posted on Apr 10, 2012 by Sergio Ulloa (G+)

South Korea's largest insurance companies have incurred sizeable losses in overseas markets over the past year due to the rise in costs associated with launching and operating branches in foreign countries. A new report from the country's financial watchdog revealed both the overall extent of the losses and what might be done to alleviate the transition from local to international insurance markets for Korean insurers going forward. A briefing released by the Financial Supervisory Service (FSS) last week, revealed that the eight overseas subsidiaries representing South Korea's three major life insurance firms, Samsung Life Insurance, Korea Life Insurance and Kyobo Life Insurance, posted a combined net loss of KW18.2 billion (US$16 million) during the 2011 reporting period. These losses were 22 percent higher than the corresponding figures for 2010, the Korea Herald noted. According to the FSS, these losses could be attributed to the increase in payouts and administrative costs Korean life insurance firms faced while expanding overseas in 2011. As a result of this development, the FSS are beginning to develop plans to increase their industry oversight capabilities. South Korea's financial regulator wants to monitor the financial health of domestic insurer overseas units going forward. As part of this, the FSS will instruct insurance companies to both bolster their existing risk management practices and sufficiently review business operating environments abroad before they attempt to make inroads into overseas insurance markets. These costs surpassed what would otherwise have been a decent reporting period for these insurers, as profit from collecting insurance premiums abroad increased by 32.3 percent overall for eight subsidiary companies of Samsung Life, Kyobo Life and Korea Life. Furthermore, by expanding into new insurance markets abroad, the FFS dataset revealed that the combined assets for Samsung, Korea Life and Kyobo stood at US$410 million as of year-end 2011, which represented a 14.7 percent increase on the previous year. In addition to these overseas operating losses, Korea's life insurance companies have also suffered a poor year with regards to their stock market investments through equity-linked products, a once popular form of savings and investment throughout the Asia Pacific region. Equity-linked, or variable insurance, products invest a proportion of a given customer's premiums (typically between 80-95 percent) in stocks and bonds to provide a combination of insurance protection and longer-term financial returns. Demand for these types of products from life insurers began to rebound following the 2008 global economic crisis but recent stock market turmoil, tied to the ongoing Euro sovereign debt fallout, is now bringing old troubles to the fore once again. According to the Korea Life Insurance Association, the combined rate of return on investment for variable insurance products fell by over 12.8 percent for Korean life firms last year. Among the big three companies, Samsung Life posted the lowest earnings rate at -10.4 percent, while Korea Life and Kyobo finished the year with higher rates of -6.28 percent and -6.94 percent respectively. As these funds incur losses, many in Korea are now wondering whether they should begin to withdraw their investments. Insurance firms remain adamant however that short-term fluctuations shouldn't impact variable insurance sales much going forward. Korea's non-life insurance companies have also seen their overseas portfolios struggle over the past year, with several insurers experiencing operating challenges similar to their life sector counterparts abroad. According to the latest FSS data, the country's top six general insurers posted a 52.2 percent decline in overseas earnings in 2011, as a high frequency of natural disasters and relatively weak risk management practices in foreign markets took their toll on company balance sheets. According to the FSS, this decline was lead by tepid overseas performance of three Korean general insurance companies in particular: Samsung Fire & Marine, Korea Re and LIG Insurance. Samsung Fire & Marine's overseas branch reported a considerable 40 percent decline in net profit from US$9.34 million in the third quarter of 2010 to US$5.43 million in the same quarter of 2011. Korean Re meanwhile went from a profit of US$6.03 million between April and September last year to a net loss of $1.8 million during the same period of 2011. Finally, LIG Insurance reported a loss of US$1.62 million this year, compared to an overall profit of $220,000 a year earlier. Despite this drop in earnings, the FSS expect Korea's non-life insurers to continue expanding abroad as growth opportunities at home remain muted. Similar to their plans for the life sector, the FSS also intend to provide local companies with more detailed and comprehensive information on overseas markets and sound risk management practices, in coordination with the International Association of Insurance Supervisors (IAIS), to hopefully mitigate costs for Korean firms looking to expand their operations overseas going forward. Expanding outside of their saturated home market has become very important for Korean insurance companies. South Korea is one of the worlds most competitive and sophisticated insurance markets, with a particularly high insurance-penetration rate in terms of premiums to gross domestic product. According to a Swiss Re sigma study, the country overtook Japan with a 11.2 percent insurance penetration rate in 2010, and now ranks behind only Taiwan (18.4 percent) and Hong Kong (11.4 percent), as the third most insured customer base in Asia. Going forward South Korea offers limited organic growth opportunities compared with other markets in the region, in particular China and India where insurance market penetration holds rates of 3.8 percent and 5.1 percent respectively, as of 2010. In those countries, insurers are focused on their home market growth, and feature large populations and favorable demographic factors which should continue to support and drive premium growth. Thus, Korea's most prominent insurance companies must now look towards expanding into other international markets as a balance to the escalating competition and declining profitability in their saturated domestic market. Companies Mentioned Korea Life Insurance Korea Life Insurance is an insurance company specialized in providing life insurance business. The company offers a wide range of insurance products including whole life/term insurance, survival insurance, death insurance, group insurance, annuity insurance and many other services for both individual and corporate customers. Substantial loan services, credit options, fund products and risk management services are also offered. Korea Life Insurance was founded as Daehan Life Insurance in 1946. The company is headquartered in Seoul, South Korea with additional offices in Ho Chi Minh City and Hanoi, Vietnam. Samsung Life Samsung Life Insurance Co. is the largest insurance company in South Korea. Founded in 1957, Samsung Life sells life and health insurance and annuities through a vast branch and agency network nationwide. The company also have operations in China, India, Japan, Thailand, the United Kingdom, and the United States. Non-life insurance is provided through its sister company Samsung Fire & Marine. Kyobo Life Kyobo Life Insurance is one of South Korea's largest life insurance groups. Founded in 1958, the company now provides life, health, pension, and asset management products to more than 10 million customers.