Foreign insurers’ Korean units likely up for sale on tougher rules, falling profits

Following in the footsteps of Prudential Financial Inc., foreign insurance companies are expected to put their Korean units up for sale to meet tightened accounting rules and cash out of the Korean insurance market where growth is slowing.

The US life insurance group Cigna was understood to be preparing to sell its local unit LINA Life Insurance Co., although LINA Life said nothing has been decided yet.

Also talked about in the market for a possible exit from Korea are US insurer MetLife, China’s Anbang Insurance Co, which owns Tongyang Life Insurance Co., and some European non-life insurance companies.

Such a possibility looms large after Prudential sold its Korean insurance arm, Prudential Life Insurance Co. of Korea, to KB Financial Group for about 2.3 trillion won ($1.9 billion) in April as part of the US insurance giant’s efforts to shed overseas assets ahead of the 2022 implementation of US life insurance accounting reforms.

Prudential’s departure, which came three decades after it entered the Korean market, marks the fourth foreign insurance firm pulling out of the country following ING Group, Allianz Group and Prudential PCA of the UK.

TOUGHER US, EU RULES MAY TRIGGER PULLOUT FROM KOREA

Analysts say a key reason for foreign insurers to consider a pullout is the tightening of US accounting standards for insurance companies.

Under the new US accounting rules effective from 2022, accounting and disclosures for long-duration insurance contracts will be strengthened to prevent potential insolvencies by setting aside enough reserves against maturing debt, which could trigger asset sales to secure capital.

In the Korean market, for example, US insurers could be tempted to sell their assets to build up reserves against local contracts, which are, by nature, debt-denominated in the Korean won.

The new guidance could push publicly traded life insurers to de-emphasize, or sell units that produce annuities and long-term care insurance, according to a report by ratings agency S&P.

Rules have also strengthened in Europe. The Solvency II Directive, a European Union law, requires EU insurance companies to raise their capital holdings to reduce the risk of insolvency.

The European Insurance and Occupational Pensions Authority, the EU’s financial regulator, recently asked insurance firms in the region to review their capital adequacy, which may force some of the weak insurers to sell off their overseas operations to meet requirements.

RECORD-LOW INTEREST RATES CUT INTO MARGINS

The Korean insurance industry is also grappling with historically low interest rates, resulting in smaller profit margins for foreign insurance firms operating in the country. Increased life expectancy has also aggravated the situation, with the top-three local players led by Samsung Life Insurance Co. dominating almost half of the country's life insurance market.

“Foreign insurers believe that it’s time to leave Korea, particularly after Prudential cut a decent deal with a good price tag,” said a local insurance industry official. “They are gauging the right time to exit.”

Amid the changing trend toward the online sale of insurance contracts, coupled with growing non-face-to-face transactions after the coronavirus outbreak, foreign insurance firms see less need to maintain branches in Korea.

“From the perspective of global insurers, it could be reasonable to spend more on future platforms, rather than keeping branches in a market where growth is limited,” said a local industry official.

Write to Sang Eun Lucia Lee at selee@hankyung.com