Insurance Research Institute: "Future Profitability of Life Insurers Uncertain... Excessive Expansion of Protection-Type Insurance Should Be Avoided"

Report on "Accounting System Changes and Response Strategies for the Life Insurance Industry"

Required Capital Rises as Interest Rates Fall... K-ICS Ratio Management Likely to Become More Difficult

It has been diagnosed that the inflow of premium income in the life insurance industry has stagnated, and the ability to secure future profitability has become uncertain due to a decline in the capital adequacy ratio (K-ICS), which has been affected by falling interest rates.

On March 22, Noh Geon-yeop, a research fellow at the Korea Insurance Research Institute, emphasized in his report titled "Accounting System Changes and Response Strategies for the Life Insurance Industry" that the industry’s portfolio is excessively concentrated in protection-type insurance, and therefore, it is necessary to enhance future growth engines through products such as annuities.

According to the report, the net profit of life insurers increased by 33.9%, from 3.7 trillion won in 2022, prior to the introduction of the new International Financial Reporting Standard (IFRS17), to 5.6 trillion won in 2024. This growth is attributable to the high volume of protection-type insurance, which has a higher insurance contract margin rate.

In contrast, the performance of savings-type insurance, including annuity products, was weak. This is because the Contractual Service Margin (CSM), which indicates an insurer’s future profit, is low for these products. In the product portfolio, general protection-type insurance shows a CSM multiple of 13.7 to 22.4 times, while annuity and savings insurance are only at 0.3 to 2.0 times.

The problem is that the CSM of life insurers is vulnerable to changes in the ‘lapse rate assumptions’ and to ‘volume differences’ resulting from the termination of existing contracts.

The CSM balance of insurers increased from 55.6 trillion won at the end of 2022 to 60.8 trillion won at the end of 2023, and to 62.4 trillion won at the end of 2024.

Looking at the CSM balance in 2024, the net increase from business activities (new contracts minus amortization) was 7.6 trillion won, but there was a decrease of 7.5 trillion won due to changes in lapse rate assumptions and a further decrease of 5.5 trillion won due to volume differences, resulting in a net increase of only 1.6 trillion won in the CSM.

Financial soundness has also declined. The capital of life insurers decreased by 20.5% (21.2 trillion won), from 103.3 trillion won at the end of 2023 to 82.1 trillion won at the end of 2024. This was due to a 28.5 trillion won reduction in other comprehensive income, which reflects interest rate fluctuations (declines).

On the other hand, required capital—which reflects the level of risk held by insurers—increased by 2 trillion won year-on-year in 2024. This is because the sale of protection-type insurance expanded, leading to an increase in risk exposure for life and long-term non-life insurance.

The Korea Insurance Research Institute forecasted that, due to changes in lapse rate assumptions and volume factors, the growth in life insurers’ insurance contract margin balances would slow, leading to a decrease in future insurance profits.

The institute further diagnosed that, going forward, available capital is expected to decrease due to increased liabilities stemming from falling interest rates and a reduction in the liquidity premium. Meanwhile, required capital is likely to rise due to the transfer of insurance risk from the expansion of protection-type insurance sales, making it difficult to manage the K-ICS ratio.

The Korea Insurance Research Institute advised that life insurers should refrain from excessively expanding protection-type insurance and should instead secure sustainable growth engines based on annuity products. It also recommended advancing their capital volatility and risk management systems.

Research fellow Noh Geon-yeop stated, “There is a need to seek a stable and long-term growth strategy based on annuity products, alongside the current strategy centered on protection-type insurance.”

He added, “To manage capital volatility, asset management strategies that match the characteristics of long-term liabilities are necessary, and it is essential to establish systems that can respond to key risk factors such as lapse risk and disability and disease risk.”

This content was produced with the assistance of AI translation services.