Major non-life insurers hold 1.43 trillion won in surrender value reserves, limiting distributable income despite strong capital ratios
Major non-life insurers set aside 1.43 trillion won in surrender value reserves in Q1
Observations have emerged that the expansion of shareholder returns, such as dividends, could be delayed for the time being as the accumulated surrender value reserves of major non-life insurance companies reach the mid-1 trillion won ($1 billion) range. This is interpreted as excessive operating expenses leading to a reserve burden amid a rapid increase in new contract expense expenditures following the introduction of IFRS 17.
According to DB Financial Investment on May 21, the combined accumulated surrender value reserves of five major non-life insurance companies, which include Samsung Fire & Marine Insurance, DB Insurance, Hyundai Marine & Fire Insurance, Meritz Fire & Marine Insurance, and KB Insurance, for the first quarter of this year totaled 1.43 trillion won (approximately $1.10 billion). This amounts to approximately 55% of the combined new contract Contract Service Margin (CSM) of 2.58 trillion won during the same period.
The surrender value reserve is a statutory reserve established after the introduction of IFRS 17, where the difference is separately accumulated from retained earnings if insurance liabilities are less than the surrender value. Even if net income is generated in accounting, this reserve is deducted first, acting as a factor that limits actual distributable income.
The combined separate net income of the five non-life insurers in the first quarter was 1.75 trillion won, but with more than 1.40 trillion won tied up as reserves, the financial resources for dividends are evaluated to have been confined to a limited level. Currently, although the five companies have a Korean Insurance Capital Standard (K-ICS) ratio exceeding 170% and are therefore accumulating only 80% of the surrender value reserve, the burden remains substantial.
Life insurance companies are no exception. Samsung Life Insurance accumulated 819 billion won, which is at the 97% level of its first-quarter new contract CSM, as a surrender value reserve, and Hanwha Life Insurance accumulated 601 billion won, corresponding to 98% of its new contract CSM. In particular, as Kyobo Life Insurance and Samsung Life Insurance, which did not accumulate reserves in the past, began doing so from the third and fourth quarters of last year, respectively, the burden across the industry appears to be expanding.
Behind the growing burden of the surrender value reserve lies the surge in new contract expense expenditures following IFRS 17. Insurance companies’ new contract expense payouts for life and long-term non-life insurance skyrocketed from 19 trillion won in 2022 to 34.5 trillion won last year. While the industry cites the expansion of new contract performance as the reason, it is pointed out that the CSM or actual operating scale has not increased at the same pace.
In fact, as sales competition centered on short-term payment whole life insurance and refundable health insurance continued, the increase in the present value of future premiums, which indicates the actual operating scale, remained at the 50% level. Conversely, the proportion of distribution margins paid to sales channels such as General Agencies (GA) has grown. While the growth of the CSM taken by insurance companies was limited, the costs paid to sales channels increased rapidly, widening the difference between deferral and amortization in accounting, which ultimately led to large-scale reserve accumulation.
DB Financial Investment explained that although the surrender value reserve is structurally generated in relation to the CSM of new contracts, its absolute scale is deeply associated with new contract expense expenditures and the deferral structure. In other words, a high K-ICS ratio does not mean a company is free from the burden of the surrender value reserve.
Accordingly, the operating performance of general insurance and auto insurance is expected to become even more crucial for non-life insurers in securing distributable income. This is because the profits generated from general insurance and auto insurance are not directly related to the CSM, a long-term insurance indicator, and therefore do not increase the burden of accumulating the surrender value reserve. In a situation where auto insurance profitability has recently deteriorated, whether the auto insurance operating balance improves could emerge as a key variable determining the capacity for shareholder returns.
Changes in regulations by financial authorities are also a variable. Starting on July 1, the authorities plan to expand and enforce the so-called ‘1200% rule’, which limits first-year commissions for large General Agencies (GA) to 1200% of the monthly premium. Consequently, market interest is growing over whether the excessive operating expense competition centered on sales channels can be alleviated.
However, the prevailing assessment is that it is still difficult to view meaningful operating expense controls as having begun in earnest. While movements to reduce excessive operating expenses are observed in some unlisted insurance companies, there is insufficient evidence to determine that this has spread across the entire industry.
Lee Byung-gun, an analyst at DB Financial Investment, analyzed, “Due to excessive cost execution, the accumulation of the surrender value reserve has significantly exceeded initial expectations at the time of the system’s introduction.” He added, “Since there is insufficient evidence that meaningful operating expense control is taking place, the possibility of insurance companies’ shareholder return levels being significantly upgraded immediately is not high.”
He further forecasted, “If the current trend continues, even for companies currently paying dividends, the burden of accumulating the surrender value reserve could become a substantial constraining factor on dividends starting in two to three years.” He continued, “Whether the reserve system is relaxed and operating expenses are controlled will emerge as an important issue in the insurance industry.”
Yoon Young-sil
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