HONG KONG--(BUSINESS WIRE)--AM Best has revised its market segment outlook to negative from stable on South Korea’s insurance industry’s non-life insurance sector. Key factors underpinning the revised outlook include the sector’s deteriorated loss ratios in major business lines, escalated pressure on investment earnings amid a historic low interest rate environment and increased asset risk due to capital market volatility.
A new Best’s Market Segment Report, titled, “Market Segment Outlook: South Korea, Non-Life,” states that South Korea’s non-life insurance segment went through a difficult year in 2019, particularly in terms of underwriting performance. Despite a 4.8% growth in gross premium written (GPW), overall industry net profit declined by 39.9% year on year, which followed a 20% decrease in 2018. The main cause of the poor results was the increased loss ratio for the automobile insurance segment and worse-than-expected profitability in the long-term insurance line. Since the outbreak of COVID-19, South Korea’s government has introduced various economic stimulus measures, including a sharp base interest rate cut of 50 basis points to 0.75% in March, the lowest level in the country’s history. Although the stock market has partially recovered from bottoming out in mid-March, it has not fully recovered to pre-pandemic levels.
At present, non-life insurers already face heightened asset risks through their investment exposure to industries that have been impacted directly by the COVID-19 pandemic. Additionally, although the full severity and longevity of impacts from COVID-19 are yet to be determined, AM Best expects that the pandemic’s impact on the real economy will inevitably result in greater credit risks from a broader range of assets, including direct and indirect investments in real estate.
AM Best is of the opinion that the overall underwriting performance of the non-life segment will continue to be under pressure for the next 12 months. It is unlikely that the recent deterioration in profitability of the market’s biggest line of business—long-term insurance—will improve over the short term without more fundamental changes, such as a revision in coverage or more adequate pricing that would reflect changes in policyholders’ medical behaviour.
Although AM Best anticipates the impact of COVID-19 on non-life insurance premium growth in the first quarter to be minimal, a certain level of new business contraction will be inevitable as the situation continues for a while. Policy cancellations are also likely to increase with the potential economic fallout from the pandemic. AM Best will continue to closely monitor the development of the industry amid the COVID-19 pandemic, and will assess any impact arising on rated insurers in South Korea.
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