Posted on 04 Jul 2017
South Korea’s new President Moon Jae-in will struggle to reform the local insurance market, according to Axco Insurance Information Services’ (Axco) latest report on South Korea.
Moon was elected earlier in May following the impeachment of his predecessor, Park Geun-hye, daughter of the former military dictator Park Chung-hee. He is seen as a liberal and has said he is open to talks with the US and China, and if conditions are right, the North Korean regime.
His willingness to resolve simmering tensions with the North was dealt a significant blow today with the latest and most concerning missile test; reportedly the North’s first successful long-range "intercontinental" missile. This follows previous missile tests, the first coming only four days into his presidency.
Axco’s report outlines that the South Korean market is in urgent need of modernisation and greater adherence to international regulatory standards; The Financial Supervisory Service (FSS) has been trying to bring about an overdue maturing of the market for some time.
One of the biggest barriers the insurance market and Mr Moon’s administration will need to overcome to reform the market will be to raise enough capital to remain solvent under International Accounting Standards Board's standard for insurance contracts (IFRS 17). It is estimated this will cost life and non-life insurers a total of around US$40bn.
The report outlines the huge potential for insurers of fully unlocking the South Korean market; last year Korea was the third-largest Asian market for both life and non-life after Japan and China. It is the world's seventh-largest life market and fourth-largest non-life market.
Market penetration compares favourably with Japan and Hong Kong also. Korea’s combined life and non-life market premium as a percentage of GDP is 12.5% (7.5% and 5% respectively) or US$3,500 per capita, higher than Japan’s (9.4% or US$3,000 per capita) but lower than in Hong Kong (15% or US$6,400 per capita).
Tim Yeates, Managing Director at Axco, commented: “Whilst the eyes of the world may be on their northern neighbours and the ongoing political tension that is being played out in the region, there is little doubt about the potential for UK and international insurers in South Korea. Compared to previous regimes, President Moon’s appears to be more progressive and we may see an increasing pace of change when it comes to opening up the country’s insurance market to foreign expertise and investment.
“In our view however, they face an uphill struggle. In 2015, foreign insurers had a market share of only 2.1%, one of the lowest foreign penetration rates in the developed world. Until recently, foreign companies have not written the long-term business that accounts for over 70% of non-life premiums.”
The report also points out that foreign companies are precluded from offering personal inducements, which are an intrinsic part of Korean business practice. Furthermore, the broking sector is underdeveloped compared to other leading Asian insurance markets, so there are no ready-made distribution channels for specialist foreign insurers to use.