The Future of Insurance Stocks' Performance... The Key is Loss Ratio

[Asia Economy Reporter Ji-hwan Park] Hana Financial Investment forecasted on the 23rd that the key factor for the insurance industry’s performance outlook, not only for the fourth quarter of last year but also going forward, will be the 'loss ratio.'

The loss ratio is the figure obtained by dividing the incurred loss amount by the risk premium. If it exceeds 100%, it means that the amount paid out as insurance claims is greater than the premiums paid by policyholders.

Doha Kim, a researcher at Hana Financial Investment, pointed out, "Although this was the case in the fourth quarter of last year, the keyword for the insurance industry this year is the loss ratio." He added, "The growth rate of automobile insurance premiums in non-life insurance is declining, and the increase in new policies is expected to lead to a rise in the announced interest rate, resulting in a slight growth in the new contract market for both life and non-life insurance."

Researcher Kim analyzed that not only this year but also after the introduction of IFRS17, the performance variable will be the loss ratio, and that the deterioration of the underwriting profit and loss, which peaked in 2017, is a common issue across the industry. He explained that for non-life insurance, the cause is the worsening profitability of indemnity insurance, which accounts for 35-40% of long-term risk premiums, and for life insurance, structural changes are due to an increasing proportion of survival benefits, which have higher loss ratios than death benefits.

Kim said, "Due to the cumulative effect of premium increases, the loss ratio for indemnity insurance is expected to decrease by 3 percentage points in 2022 compared to the previous year," and "the long-term risk loss ratio for non-life insurance is estimated to be at a similar level to the previous year." On the other hand, for life insurance, considering the base effect of unusually worsened claims last year due to the concentration of medical expense claims that were suppressed in 2020, the loss ratio is expected to improve by an average of 2 percentage points compared to the previous year.

Investment in insurance stocks is evaluated to be at a point where fundamentals and IFRS17 are more important than quarterly earnings. Researcher Kim emphasized, "With the premium rate increase for indemnity insurance being decided favorably this year, the fundamental variable for the industry in the first half is expected to be the trend of the new contract market," and "in the second half, the concretization of the impact of IFRS17 introduction by company, and issues such as the setting of fees for oriental medicine treatment in automobile insurance, are expected to be positive factors."

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