The performance polarization between large insurance companies and small to medium-sized insurance companies is intensifying. While large companies have achieved record-high results, small and medium-sized companies are seeing their profits decline each year. The introduction of the new accounting standards (IFRS 17) and stricter assumptions about termination rates are analyzed as the causes.
According to the insurance industry on the 26th, five large non-life insurance companies, including Samsung Fire & Marine Insurance, DB Insurance, Meritz Fire & Marine Insurance, Hyundai Marine & Fire Insurance, and KB Insurance, recorded their highest-ever results last year. Samsung Fire & Marine Insurance reported a net profit of 2.0768 trillion won last year, up 14% from the previous year. During the same period, DB Insurance grew by 15.3% to 1.7722 trillion won, while Meritz Fire & Marine Insurance recorded a 9.2% increase to 1.7105 trillion won. In particular, Hyundai Marine & Fire Insurance saw its net profit increase by 33.4% from the previous year, surpassing 1 trillion won.
In contrast, the net profit of small to medium-sized insurance company Heungkuk Fire & Marine Insurance decreased by 60.6% from the previous year's record high of 295.5 billion won to 11.65 billion won last year. NongHyup Insurance reported net profits of 114.7 billion won in 2022, 113.3 billion won in 2023, and decreasing to 103.6 billion won last year.
One reason for the widening performance gap is the new accounting standards (IFRS 17). The key to revenue in IFRS 17 is the Contractual Service Margin (CSM). CSM is a liability that is amortized at specific points in time to become revenue. If a product is expected to generate 10 billion won in profit over 10 years, then 1 billion won is recognized as revenue each year. The greater the CSM, the larger the amortization profit, which directly correlates with profit (insurance profit and loss). This is why insurance companies are focusing on selling products that benefit the CSM, such as long-term insurance.
As a result, it was projected that large insurance companies, which have a large number of existing contracts and high-quality contracts, would see an increase in net income upon the introduction of IFRS 17. In fact, Samsung Fire & Marine Insurance's CSM amortization profit increased from 1.539 trillion won in 2023 to 1.612 trillion won last year, while the amortization profit from new contracts decreased from 85 billion won to 48 billion won during the same period. The amortization profit of existing contracts rose from 1.48 trillion won to 1.564 trillion won, thus increasing overall insurance profit and loss. This indicates that the contribution to profitability was greater from existing contracts than from new contracts.
On the other hand, small and medium-sized insurance companies did not have a portfolio advantageous to CSM. They primarily sold products that were cheaper and more accessible to compete with large insurance companies. In particular, the proportion of no or low-termination insurance is relatively high. No or low-termination insurance refers to products that are inexpensive but provide little or no surrender value when canceled.
However, as financial authorities presented guidelines to conservatively assume the termination rates of no or low-termination insurance, it led to a decline in profitability. If the termination rate of no or low-termination insurance is set low as per the guidelines, the CSM decreases. Large insurance companies also had a significant proportion of no or low-termination insurance, but the impact was less than that on small and medium-sized insurance companies.
An industry insider noted, "Small and medium-sized insurance companies primarily hold small contracts, and as actuarial assumptions (loss ratios, termination rates, etc.) change, the losses of particularly small and medium-sized non-life insurers have increased. Large insurance companies have good portfolios, so even if they are impacted in certain areas, they have the ability to endure because they make profits in other areas."
Concerns have been raised that the performance gap between large and small to medium-sized insurance companies may widen further in the future. Although all insurance companies are engaged in fierce competition by focusing on selling products advantageous to CSM both before and after the introduction of IFRS 17, it is said that it will be difficult to change the trend of performance concentrating on large insurance companies that have capital strength, sales power, and brand. As of the end of June last year, the market share of the five largest non-life insurance companies based on gross premium income was around 84.2%.