Korean Life Insurance Industry – A Comparative Historical Perspective

272 Korean Life Insurance Industry – A Comparative Historical Perspective NFT 3/2006 Introduction The development of the Korean life insurance industry during the latter part of the twentieth century is one of the exceptional phenomena. Between 1970 and 2000, the annual growth rate of premium volume was 46.2 percent while the annual growth rate of insurance asset was 34.4 percent.1 This rapid expansion of life insurance industry made Korea one of the largest life insurance markets in the world, ranking seventh in terms of total premium volume as of 2003.2 Although Korea’s share in the world life insurance market is still as low as 2.03 if we divide premium income with GNI, the rate of life insurance premium income in Korea is Korean Life Insurance Industry – A Comparative Historical Perspective by Annette H. K. Son Ek Annette H. K. Son Ek hykyson@yahoo.com Annette H. K. Son Ek, Ph.D. in Economic History Department of Korean Studies, University of Stock- holm. The author wants to express her gratitude to the Swedish Insurance Association for the traveling grant that had enabled me to conduct field research in Korea during the spring 2005. The development of the Korean life insurance industry during the latter part of the twentieth century is one of the exceptional phenomena. Between 1970 and 2000, the annual growth rate of premium volume was 46.2 percent while the annual growth rate of insurance asset was 34.4 percent. This study argues that this rapid expansion of the Korean life insurance industry was possible due to three major factors: the Korean government’s interest rate policy in favor of life insurance industry, the unique life insurance sales method based on personal relationship and the growth-oriented business strategy on the part of the Korean life insurers. higher than that of most countries in a similar level of economic development. The aim of this study is to explore the life insurance market in Korea from a compara- tive historical perspective in order to get a better understanding on how the Korean in- surance market could have developed in such a large scale within a short period of a half- decade. 273 Korean Life Insurance Industry – A Comparative Historical Perspective Introduction of modern life insu- rance to Korea British insurers introduced the modern form of life insurance to Korea in the late nine- teenth century. In 1905 when Japan gained a complete control of Korea it succeeded the role played by the British insurers.3 Korean’s own involvement in modern life insurance business took place in 1921 when the Joseon Life Insurance Company was established.4 The majority of insurance sales during the colonial period were forcedly made in order to mobilize financial resources for engaging the wars with the allied forces.5 There are two unfavorable legacies from the colonial period on the development of the life insurance in- dustry in Korea. One is the creation of the negative attitudes toward life insurance in- dustry among the ordinary Koreans and the other is the lack of insurance specialists in both theoretical and practical fields. Life insurance in a stage of embryo (from 1945 to the early 1960s) The independence of Korea from Japan in August 1945 provided the Korean life insur- ance industry with a new momentum as life insurance companies with Korea’s own capi- tal and manpower earnestly began to be estab- lished. Besides Joseon Life Insurance Com- pany Korea saw the opening of eight new life insurance companies for a short period of 8 years from August 1945 to July 1953, totaling nine life insurance companies. The limited market size of the Korean life insurance in- dustry at that time led to a fierce competition among these companies.6 Two of the victims from this high competition among them were Jeil Life Insurance and Hyeopdong Life In- surance that were forced to close down due to the problem of insolvency. In contrast with these two cases there is also a success story, i.e. the case of Daehan Kyoyuk Insurance. This insurance company introduced a new type of life insurance product, so called edu- cation insurance. The sale of this life insur- ance product was successful both in drawing the attention from the ordinary Koreans on the life insurance and in mobilizing the national capital for the industrial development of Ko- rea.7 It also played an important role in the expansion of the Korean life insurance market from the 1960s onwards. During this early period of life insurance development in Korea a high portion of life insurance asset was invested in immovable property such as land and buildings due to the underdevelopment of the Korean capital market.8 Therefore the majority of life insurance companies often suffered from a lack of flexibility. Life insurance in a stage of building a stable base (1962-1976) During this period the Korean life insurance industry made a stable base for the develop- ment that lasted well into the mid-1980s. This was mainly possible thank to the favorable regulations and various inspection policies implemented by the Korean government.9 Especially in 1969, the government issued a regulation concerning the management of in- surance assets. By these measures, the insur- ance companies were encouraged to lend money to the other companies and to purchase bonds and stocks in Korea’s growing capital market. Besides the systemization of regulatory pro- visions on life insurance business, the Korean government also undertook measures that were intended to improve the financial condition of life insurance companies. In the course of time the license of two life insurance compa- nies was revoked while four life insurance companies were merged into two companies. By these measure, a period of oligopoly sys- tem of six life insurance companies was estab- lished, which lasted until the mid-1980s. 274 Korean Life Insurance Industry – A Comparative Historical Perspective Life insurance in a period of modernization (1977-1984) Thank to the success of the economic devel- opment plans as well as the increase in per capita GNP, the life insurance business in Korea made a rapid growth since the early 1960s. In 1976 the total asset of life insurance companies recorded 145.2 billion Korean Won while annual premium income was 85.7 billion Korean Won. This is the 23rd and 24th times’ increase in comparison with the correspond- ing figures in 10 years ago.10 In spite of this quantitative growth of life insurance industry, the life insurance industry faced with a series of problems. Three major problems were a disorganization of insurance sales, a low rate of insurance contract maintenance, a high operating expense. All these led to a continu- ing financial difficulty of life insurance com- panies. Therefore the government put into a series of reform policies to modernize life insurance industry in 1977. In the 1960s and the 1970s the education insurance played an important role in the development of the Korean life insurance industry. When the effect of education insur- ance was on the wane in the early 1980s, the Korean life insurance market saw the intro- duction of a new life insurance product, i.e. cancer insurance. Up to this period a line’s share of insurance sales was done through the female insurance salespersons, so-called “insurance aunties” in her 30s and 40s who made a door-to-door visit to the presumptive customers. The Koreans had purchased life insurance products more with short-term savings in mind less with dealing the risks.11 Life insurance in a period of a global challenge (1985-1996) Since 1986-1987 the Korean life insurance industry faced with the challenges from both within and outside the country. Those chal- lenges are often epitomized as the terms such as liberalization, openness and globalization. Under the influence of liberalization, six new life insurance companies with a nation- wide network and nine life insurance compa- nies with the limited business territory to the specified provincial area were opened in the late 1980s. The deregulation of life insurance industry also took place in the areas such as the development of insurance products, the method of premium rate setting and the strengthened consumer sovereignty.12 With the external changes such as the im- plementation of Uruguay Round and the launching of WTO13 and Korea’s accession to the OECD in 1995, the Korean life insur- ance market was widely opened to foreign insurers.14 In the short time span of five to six years from the late 1980s to the early 1990s seven foreign-Korean joint life insurance compa- nies, three local subsidiaries of three foreign life insurance companies and four branches of foreign life insurance companies entered into the Korean life insurance market. The liberalization of insurance business within Korea and the openness of insurance business to foreign life insurance companies signaled the end of the oligopoly of six do- mestic life insurance companies and the be- ginning of the fierce competition of 33 life insurance companies in Korea.15 A number of reform measures that were intended to further liberalize the life insurance market were also put into effect during this period. Important changes include the abo- lition of economic consideration when estab- lishing life insurance companies, the allow- ance of cross-border among life insurance companies, and the introduction of pro- fessional insurance agent system.16 All these reform measures imply that the marketing activity by life insurance companies grew its importance due to the environmental change 275 Korean Life Insurance Industry – A Comparative Historical Perspective of the financial market. All these changes went in parallel with the improvement of the conditions for the devel- opment of life insurance market. They are such factors as a drastic increase in the life risks for citizens as a result of the diversifica- tion of economy and a disintegration of tradi- tional extended family system, a heightened interest in healthy life among individuals fol- lowed by the rise of income level. The changed conditions for the development of life insur- ance industry imply the change in the prefer- ence for different kinds of life insurance prod- ucts. The persistent interest in term life insur- ance with focus on the protection of survived family members gradually went over to an increasing interest in the whole life insurance and annuity with focus on the protection of life in old age.17 Life insurance in a period of restructuring (1997 to 2003) The life insurance industry is one of the most severely hit industries among all industries during the 1997-1998 Asian financial crisis. There are three reasons for this. The first and the most important reason was a drastic in- crease in the life insurance companies that had faced either with the problem of liquidity or insolvency. As mentioned earlier, there was a high involvement of life insurance industry by the chaebols. At the time of the financial crisis, the top five chaebols (Hyundai, Sam- sung, LG, Daewoo, and SK) owned the differ- ent life insurance companies. And approxi- mately 18.9% of loans by the life insurance companies went to the companies that were part of the chaebols. Many of these companies had invested the borrowings from the finan- cial institutions into long-term projects whose investment effect can come slowly. The sec- ond reason is that a considerable portion of insurance was invested in the other compa- nies that could not repay their loan due to the financial difficulties. The third reason is that since 1987 a high portion of insurance operat- ing asset was invested in stocks and bonds in step with the expansion of the capital market. A variety of reform measures were under- taken in order to overcome the financial crisis as well as to strengthen the competitiveness of life insurance business. In the late 1997, these new insurance supervisory authorities (FSC/ FSS) went into restructuring of the insurance industry in order to regain the confidence of the financial market. Under the influence of the financial crisis, a far-reaching reform of financial industry was conducted. Since the restructuring of the life insurance industry began in 1998, the business rights of four life insurance companies have been withdrawn, and six companies were sold off owing to poor performance. One of the better results of the restructuring of life insurance industry in the aftermath of the financial crisis is that Korean life insurers evolved into a highly concentrated industry. This has proven by the changing market share of the three dominant life insurance companies, Samsung Life In- surance Co., Kyobo Life Insurance Co., and Korea Life Insurance Co. The market share of these large domestic insurance companies has increased from 67.2 percent in 1997 to 75.0 percent in 1999. The market concentration increased even more, owing to M&A activity, resulting in a peak market share of 80.9 per- cent in 2000. Since then, the market share of the three major domestic companies has de- clined to 78.0 percent in 2001 and down to 51.7 % in 2004.18 The major cause of the decline is the growth of foreign life insurance companies that entered the Korean life insur- ance market starting from the late 1980s. In order to meet the global challenges to the life insurance industry two important steps toward financial convergences were taken.19 One is the revision of the Insurance Business Law and its enforcement regulations in 2000. By this revision all types of financial institu- 276 Korean Life Insurance Industry – A Comparative Historical Perspective tions were allowed to form alliances to move into the so-called “non-core business” of oth- er financial institutions. The other was the introduction of bancassurance.20 By these measures the insurance market was open to all financial institutions in Korea such as conven- tional banks, security firms and investment firms, mutual saving companies, post offices, various co-operations.21 Noteworthy is that the size of foreign life insurance companies are mostly much small- er than that of domestic life insurance compa- nies. Despite their small size, foreign life insurance companies recorded better perform- ance than their domestic competitors with respect to profitability and financial stability. It is apparent that domestic insurance compa- nies lag behind global rivals in the develop- ment of sophisticated insurance products and services and sales techniques.22 Especially, in the bancassurance business, six foreign life insurers joined and attained 33.3 percent of bancassurance market on the premium basis in 2003. The market share of foreign life insurance companies is continuously increas- ing, recording 26.1 percent in the early 2005.23 One good effect of high competition among domestic and foreign life insurer and the di- versification of life insurance sales channel is that the Korean public have gained a much better possibility to choose different life in- surance products than ever. Another conspic- uous change in the Korean life insurance industry that occurred in recent years is the change in the personal structure of the life insurance salespersons. Instead of ”insurance aunties” who have dominated in the area of insurance sales in the earlier period, the number of “insurance uncles” is gradually increasing. In 2001, the proportion of male insurance salespersons was only 8.3 percent and this figure went up to 14.7 percent in 2004 and further up to 15.6 percent in May 2005.24 Some factors behind the rapid expansion of the Korean life insu- rance industry There are at least five reasons for that. First, it depends on the interest rate system that the Korean government adopted. In the 1960s the Korean government promoted industrial de- velopment. To this end the Korean govern- ment made bank interest rate as low as possi- ble in order to lend capital with as low interest rate as possible to the industries that the Kore- an government had specifically in mind. In this process a shortage in capital arose. In order to deal with this lack of capital for industrial development in the 1970s the Kore- an government encouraged the development of the second financial businesses such as short-term financing companies and insur- ance companies. In order to maximize the mobilization of financial capital to these fi- nancial institutions, the Korean government encouraged the insurance companies to make insurance products with a strong characteris- tic of savings rather than only a characteristic of dealing with risks. At that time there was also a high tendency among Koreans to buy insurance policy more for the purpose of sav- ing than a pure of insurance. The second reason for the extraordinary size of the Korean insurance market has to do with the insurance sales method on the basis of personal relationship. Contrary to the in- surance salesmen in the Western countries who utilize an advanced sales method in sell- ing the insurance policies the Korean insur- ance salespersons have long utilized the per- sonal relationship. The third reason that the Korean insurance business expanded so quickly has to do with the growth-oriented attitude of insurance busi- nessmen. In the semi-monopolistic market the insurance businessmen have often consid- ered an extra profit will be possible only though a rapid expansion of sales volume. 277 Korean Life Insurance Industry – A Comparative Historical Perspective They have also thought that if their business is big they will have a better position in negoti- ating with the government. The fourth reason for the rapid develop- ment of Korea’s life insurance has to do with the ownership of the life insurance industries. Unlike many Western countries where there is some kind of division between the financial capitalists and the industrial capitalists, in Korea there exist a close relationship between the life insurance companies and the industri- al capitalists, chaebols. This is the reason that many Koreans are suspicious about the oper- ation of the life insurance companies. In any case the growth of life insurance industry went hand in hand with the expansion of chaebols. The fifth reason is the inadequate develop- ment of the social insurance system in Korea. In comparison with other industrialized coun- tries, the introduction of social insurance to Korea was made much later than those coun- tries. The policy-makers in the Korean gov- ernment in the 1970s were very much indus- trial development-oriented while paying less attention to the social development. These policies could be sustained in the 1970s dur- ing which the democratic political system was not fully developed. But in the 1980s when the democratization of the Korean society began there was a much open discussion on how to distribute the fruits of economic development to the Korean population at large. In concluding the liberalization, globaliza- tion and openness of the Korean economy would certainly have less explanatory power in the expansion of insurance market in Ko- rea. The possible reasons are as follows. The gap in interest rate among different financial institutions is on the way out. The relationship between people are transforming from a tradi- tional-bound to a more functional-bound due to the urbanization and the decrease in the size of family in the contemporary Korean society. Moreover recently there are also expansions in the social insurance system although the coverage is still limited in comparison with the social insurance system in the advanced countries. Especially the national health in- surance system in Korea is still characterized by very low benefit coverage, with high out- of-pocket payment. This high out-of-pocket payment by patients creates the necessity to fill out the gap by private life insurance com- panies. This can imply that there is still much room for the expansion of life insurance in- dustry in Korea. Notes 1 The Korean Association of Life Insurance (2000) Fifty Years History of the Association of Life Insurance, pp. 937-938. 2 Korea Insurance Development Institute (2005) Korean Insurance Industry 2004, p. 23¸ Sigma, No 3/2004, Swiss Re. 3 Han, Woo-keun (1981) The History of Korea, Seoul: The Eul-Yoo Publishing Company, pp.396-402; Black, Kenneth, jr. and Harold D. Skipper, jr. (1994) Life Insurance, Prentice- Hall, Jeong, Hongju (2005) Risk and Insurance in Korea. Seoul: Munyoungsa.. 4 Korean Association of Life Insurance (2000) Fifty Years History of the Association of Life Insurance, pp.198-199. 5 Ibid., p. 206. 6 Roe, Young-Kyung (1991) A Study on the Re- form Measure for the Life Insurance Sale System in Our Country, master dissertation, Taegu Uni- versity. 7 Kyobo Life Insurance (1998) 30th Anniversary of Kyobo Life Insurance, Seoul. 8 Korea National Statistical Office (1995) Ko- rea’s footsteps in a statistical perspective. Seoul, p. 289. 9 Kang, yongsu and Gong deokam (2001) “A Details State & Pending Problems in Life Insur- ance Industries in Korea and Their Implica- tions” Review of Business & Economics Vol. 14, No. 4, p. 4. 10 Korean Association of Life Insurance (2000) Fifty Years History of the Association of Life Insurance, p. 938. 278 Korean Life Insurance Industry – A Comparative Historical Perspective 11 Kim, Eok-heon (2002) Insurance theory and practice, Seoul: Samyeongsa, pp. 237-238. 12 Yoon, Dae-Soo (1999) A Study on the Improve- ment of Marketing Strategy of the Life Insurance Industry in Korea, master dissertation, Kon- Kuk University. 13 The seeds of the Uruguay Round were sown in November 1982 at a ministerial meeting of GATT members in Geneva. It took seven and a half years from 1986 to the end of 1994, almost twice the original schedule. One of the main issues related to the developing countries was the open- ing of service market, especially opening of financial market and deregulation. The negotia- tion started in the Uruguay Round was contin- ued under the context of WTO that began oper- ation in January 1995. 14 As a matter of fact, there were seven American life companies that were operating in Korea up to the mid-1980s. Their business was limited in the sense that their life insurance products were only sold to the American military personnel and their families and other foreigners in Korea (Korean Association of Life Insurance, 2000, Fifty Years History of the Association of Life Insurance, p.308). Kang, Yong-Su and Gong, Deok-Am (2001) “A Details State & Pending Problems in Life Insurance Industries in Korea and Their Implications” Review of Business & Economics Vol. 14, No. 4, p. 3. 15 Kim, Chul-kyo (1995) “Financial Environment & Life Insurance,” Social Science Research, Vol. 12, pp. 95-103. 16 Korean Association of Life Insurance (2000) Fifty Years History of the Association of Life Insurance, p. 311. 17 Kim, Chul-Kyo (1995) “Financial Environment & Life Insurance” in Social Science Studies Vol. 12. 18 Donga Daily, “Foreign companies are strong in life insurance industry, taking 17.4% of market share,”2005-01-12,p. 35; Maeil Economy Dai- ly, “The market share of foreign life insurance companies is increasing,” 2005-07-21. 19 Ibid, pp. 35-36. 20 Bancassurance, a coined French word of Assur- ance (insurance) and Banque (bank), refers to the sale of both insurance and bank products through business alliance or joint venture be- tween banks and insurers. 21 Jeong, Hongju (2005) Risk and Insurance in Korea. Seoul: Munyoungsa. 22 Kim, Jae-Bong (1996) “A Study on the Manage- rial Factors Influencing the Economics of Scale of Korean Life Insurance Industry” in The Journal of Social Science Study, Vol. 3. 23 Jeil Economic Daily, “Small-and medium-sized foreign life insurance companies are strong in bankassurance business,” 2006-02-27. 24 Maeil Economic Daily, “Insurance uncles are active,” 2005-08-18.