In a country which is dominated by one national reinsurer and suffers from a saturated, slow-growing market, the challenges for the reinsurance industry are plenty. We speak to RGA Korea CEO Michael Shin about the outlook for Korean reinsurers and the changes that the market may see in the coming year.
The Korean Financial Supervisory Service (FSS) announced in June 2018 that it was planning to reduce barriers to entry for foreign insurers in order to improve price competition and reduce the influence that the national reinsurer, Korean Re, has on the market.
The increased competition is a worry, although Mr Shin is confident in RGA Korea’s ability to maintain its position in the market as the second-biggest reinsurer. “As long as it’s a fair competition, I don’t really mind,” he said. “Obviously the market is not that easy, especially the Korean market. So, unless you know you are really equipped to meet our clients’ needs, which are very complicated, it’ll be very tough for anyone.”
The complications for Korean insurers are many, the biggest of which is the heavy saturation of the market. As a life reinsurer, Mr Shin believes that the life insurance sector is the one that has been most damaged over the past few years. “One of the unique qualities of the Korean market is that non-life insurance companies can sell long-term products. Personally, I think that caused problems for a lot of life insurance companies because, for many reasons, I think non-life companies can sell more product. Because of that I think [life insurers] lost their market share - and quite a bit of it too.”
He said that non-life insurers had a lower risk rate than life insurers. “Life insurers have had a few bumps in the past and they use this experience in setting new risk rates, which brings the rate up. However non-life insurers don’t have any past experiences and so they use just general population data and this leads to lower rates.
“So now the life insurance companies are not just competing among themselves, they now have to compete with non-life insurance companies too. So that makes it pretty tough for us to help them,” he said.
Focusing on products
One of the ways RGA is helping its clients overcome these challenges is through better product design. “We have been really focusing on product development and investing heavily locally to create a team to focus on new solutions,” he said.
“We also have what we call underwriting as a business team, who continually look at underwriting solutions to help our clients. And then we have a consumer research team just to understand our clients and their clients. So, we have all of these segmented teams to focus on those areas, and I think that will make a difference,” he said.
As a reinsurer, Mr Shin believes that when client companies are willing to take up certain a level of risk, the reinsurer would have to create leverage to be ahead in terms of knowledge and technical skill. “So, then we create a gap. But once we create this gap, if we don’t continue investing to expand this gap then they’ll just catch up. They catch up pretty fast in fact,” he said.
He added that insurers have a far greater understanding of risk than ever before, which leads them to retaining more risk on their own, instead of relying on reinsurers.
Pali-pali
Fast seems to be the operative word in Korea. Said Mr Shin, “We have in Korea a term ‘pali-pali’. That means ‘hurry up’ or ‘faster’. Basically, everybody has less patience. When we want something, we want it right away.”
While he admits that he does not know “whether that’s good or bad”, he believes that it pushes the industry to move forward quickly. “The product lifespan here in Korea is getting shorter and shorter. To be honest I think it is only three months these days, so when we launch a new product, three or four months later we begin to see a decline happening, so we’ve got to come up with new products. That means we have to come up with new products every few months, and that’s not easy,”
IFRS17
With the coming of IFRS 17 and new capital regimes in Korea, a lot of life insurance companies are facing capital woes. “Capital injections are needed for their company because they’ve been selling a lot of high interest rate, minimum guarantee product for a long time. I think that is really causing a bit of a problem,” he said.
Several solutions have been discussed within the industry, such as coinsurance and financial reinsurance, in order to come up with this new capital. However, Mr Shin believes that Korea is not quite ready for these new forms of (re)insurance.
“Our regulators are definitely seeing that the market needs these solutions. So, they are starting to look into it seriously. We have also been investing quite heavily in terms of time and effort to convince our regulators and our clients on the benefits,” he said.
“And obviously IFRS, I think, will trigger the need to adopt financial reinsurance in Korea. Obviously, it will not be the 100% solution for the issue. But it will at least be one of the vehicles that they can definitely consider in solving their capital issues.”
He added that the life insurance industry is now trying to shift away from the savings products and move more towards protection products. “It will give them better positioning and capital when the new IFRS is implemented. They are really interested in coming up with new types of protection products. So again product development is a main topic for them and for us.” A