Insurance Companies' Overseas Reinsurance Losses Total 2 Trillion Won Over 5 Years... Financial Authorities Remain Inactive

- Causes of Excessive Contracts by Domestic Insurance Companies
- Financial Authorities Aware of Issues but Lack Measures for Years

[Asia Economy Reporter Kang Nahum] It has been revealed that the cumulative losses caused by reckless overseas reinsurance by domestic insurance companies have approached 2 trillion won over the past five years. Financial authorities are aware of this but have been slow to devise countermeasures.

According to data submitted by the Financial Supervisory Service to Song Jae-ho, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, the overseas reinsurance balance of domestic insurance companies showed a total loss of 1.9907 trillion won over about five years from 2016 to the first half of this year.

Reinsurance contracts involve an insurance company or reinsurer transferring all or part of its contractual liability to another insurance company or reinsurer for risk management purposes, essentially serving as "insurance for insurers."

[Image source=Yonhap News]

Analyzing by type of insurance company, the cumulative loss in the non-life insurance sector recorded the largest loss of about 1.3432 trillion won over five years. The reinsurance sector showed a cumulative loss of 506.5 billion won, and the life insurance sector a loss of 141 billion won, indicating deficits across all three major insurance sectors.

Reinsurance contracts are broadly classified into two types: inward reinsurance contracts, where insurance liability is received from other insurers, and outward reinsurance contracts, where an insurer cedes its insurance liability to other insurers.

In particular, the deficit was significant in contracts ceded by domestic insurers to overseas insurers. Over the past five years, inward reinsurance contracts recorded a profit of 1.7482 trillion won, but outward reinsurance contracts incurred a loss of 3.7389 trillion won.

In the case of overseas outward reinsurance, since domestic insurers transfer part or all of their insurance liability to overseas insurers, the premiums paid by domestic customers flow to overseas insurers as costs. Conversely, when insurance claims occur, the insurance payouts and commissions received from overseas insurers become revenue for domestic insurers.

Over the past five years, the reinsurance premiums paid by domestic insurers to overseas insurers amounted to 21.0127 trillion won, while the reinsurance claims and commissions received from overseas insurers totaled only 17.2737 trillion won.

These losses from overseas outward reinsurance stemmed from excessive ceding. According to financial authorities, overseas outward reinsurance is generally conducted to diversify the risk burden of insurance products contracted by domestic insurers. However, due to an excessive focus on risk mitigation, outward reinsurance contracts have continued to be made without a thorough reinsurance management system.

Despite this situation, financial authorities have not prepared measures to reduce losses from overseas outward reinsurance. The issue of losses from overseas reinsurance was already pointed out in 2018. At that time, the Financial Supervisory Service stated it would actively support inward reinsurance of high-quality overseas risks and enhance the underwriting function to make comprehensive decisions on contracts, continuously promoting the advancement of reinsurers' profit and loss structures. However, according to Song’s office, it has been confirmed that no measures to improve reinsurance profitability have been established to date.

Song said, "Two years ago, financial authorities announced plans to enhance the sophistication of insurance companies' reinsurance management and the international consistency of supervisory systems, but they are still only diagnosing the reality of insufficient capital competitiveness of domestic insurance. Instead of any meaningful improvement plans, losses are only deepening. There is a need to prepare direct and effective loss compensation measures," he emphasized.

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