South Korean non-life insurers to suffer heavy loss August floods: Fitch

However, reinsurance safeguards will shield most insurers from major losses, AM Best said

The August flooding event in South Korea, which recorded an estimated KR₩140b ($110m) as of 12 August, will cause a huge strain on the non-life insurance industry’s profit, according to global credit and financial analyst Fitch Ratings.

In a report, Fitch Ratings said that preliminary industry estimates indicate that insurance claims from the flooding, which has not abated due to the continuous downpour, are likely to exceed KRW150b or less than 0.2% of Korea’s entire non-life direct premiums written (including long-term businesses) in 2021. 

The General Insurance Association of Korea recently reported that twelve motor insurers received more than 9,100 cases of motor damage claims as of 11 August totalling KR₩127b ($97m).

“We believe the flooding losses, stemming primarily from motor vehicle damages, will be material to the non-life insurance industry as estimated claims continue to develop. The motor business constituted about 21% of total non-life premiums written, including long-term businesses, in 2021. Flooding risk associated with motor insurance is underwritten on a commercial basis,” Fitch said.

Fitch said they expect direct insurers to recover part of their insured losses from the floods from reinsurers, contingent on their reinsurance arrangements in terms of the structure, coverage limits, and exclusions.

“Direct insurers may have to absorb larger claims if they have not made arrangements for catastrophe coverage on their portfolios. The average regulatory risk-based capital ratio for the non-life industry was 210% in end-March 2022, above the regulatory minimum of 100%. The availability of a capital buffer, which varies from company to company, would also provide some much-needed relief to cushion flood losses,” Fitch Ratings added.

Fitch Ratings also warned that it is critical for insurers and reinsurers to be equipped with appropriate risk-modelling or catastrophe-management frameworks to account for potential natural hazard losses for selection, underwriting, premium pricing or capital management.

“The increased frequency of natural disasters has led to a notable increase in the number and size of claims related to changes in climate patterns across the globe,” Fitch said.

Limited loss

ChanYoung Lee, Associate Director at AM Best told Insurance Asia that  South Korean insurers will be protected from losses associated with the flooding events through reinsurance buffers. She said that losses in the industry will be ‘manageable’ as this type of event are well understood by the industry despite South Korea not being prone to natural catastrophes.

“We expect the combined net loss amount for the four largest non-life insurers, which represent a vast majority of the auto segment in South Korea, to be capped at a level that is well managed. The total net loss to the top four players is estimated to be about 2% of their combined after-tax profits in the first half of 2022. The net loss to Korean Re, which is the main reinsurance provider for non-life insurers in the nation, is also expected to be limited through its retrocession programmes,” Lee added.

Dubbed by local reports as one of the worst floodings in 115 years since 1907, the rain in 8 August broke several country records for the amount of rain.