Has the Insurance Profit Cycle Passed Its Trough?...Rebound Expected Led by Non-Life Insurers

Non-life Insurers: Focus on Changes in Auto Insurance and Physical Therapy

Life Insurers: Interest Rates and Securities Gains as Key Variables

"1,200% Rule Will Take Time to Show Effects"

There are growing observations that the insurance industry’s profit cycle has passed its trough. As loss ratios in auto insurance improve and the burden from long-term insurance losses is expected to ease, there is a forecast that insurance profits—especially for non-life insurers—could rebound. For life insurers, however, improvement in investment gains due to rising interest rates and valuation gains on securities are cited as key variables, suggesting that the recovery trajectory will vary by sector.

According to the financial industry on July 12, it is expected that the second quarter results of insurance companies this year could mark a turning point in the previously deteriorating insurance profit cycle, particularly for non-life insurers.

In particular, the improvement in auto insurance loss ratios is seen as a key factor in this profit rebound. As the effect of premium hikes implemented in February this year gradually takes hold, and as rising oil prices have led to a decrease in driving volume, the deficit burden is expected to ease.

Attention is also being paid to whether non-life insurers can improve profits from long-term insurance. Even if new long-term insurance contracts increase, if actual insurance payouts exceed expectations, the effect on performance improvement could be limited. While recent increases in loss ratios and actuarial assumption changes have added pressure for contract service margin (CSM) adjustment, it is suggested that this pressure may somewhat ease in the second quarter. Seunggeon Kang, a researcher at KB Securities, pointed out, “Since the third quarter of last year, the sharp deterioration in long-term insurance profits has been slowing.”

The shift of physical therapy to managed care benefits, which has been at the center of controversy over losses in indemnity health insurance, is also cited as a factor raising expectations for future stabilization of loss ratios. However, as the actual effect of the system will take time to be reflected in reduced insurance payouts, many see this as a mid- to long-term factor for loss ratio stabilization rather than a driver of short-term performance. Doha Kim, a researcher at Hanwha Investment & Securities, said, “If indemnity insurance payouts normalize following the implementation of managed care benefits in the second half, we can expect improvements in the difference between actual and expected payouts. It is important to monitor whether the worst phase of poor performance due to this gap, which began in the fourth quarter of 2024, is coming to an end.”

For life insurers, rather than a clear improvement in insurance profit itself, investment gains from rising interest rates or valuation gains on held securities are cited as the main variables. Rising yields on long-term bonds also raise the discount rate for insurance liabilities, which in turn helps reduce the burden on net assets and the new risk-based capital regime (K-ICS) ratio.

Meanwhile, even if actual insurance profits improve, there is analysis that uncertainty remains regarding whether insurers will expand shareholder returns. While the regulation limiting first-year upfront commissions to 1,200% of monthly insurance premiums was extended to corporate agency (GA) channels this month, there are still concerns that the competition for incentives has not completely disappeared. Excessive spending on new contract acquisition costs leads to a greater burden for insurers to set aside surrender value reserves, which can restrict payout capacity for dividends even if accounting profits are recorded. Byunggeon Lee, head of the research center at DB Financial Investment, stated, “Although the 1,200% rule has been extended, it does not appear that excessive commission payments will disappear immediately. If efforts to close loopholes (such as reducing opportunities to circumvent regulations) continue, new contract acquisition costs may stabilize from next year.”

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