The author is an analyst of Shinhan Investment Corp. She can be reached at email@example.com. -- Ed.
Structural reform of indemnity/auto insurance to lead to reasonable premium adjustment in 2020
The Financial Services Commission (FSC) has included the structural reform of medical indemnity and auto insurance in its 2020 business plan. The product structure of indemnity insurance is expected to be revamped by introducing a differential premium system and revising the scope of coverage and portion of deductibles. For auto insurance, the FSC seeks to increase deductibles for drunk driving accidents and surcharges for high repair cost vehicles and improve the bodily injury liability and insurance payments.
It remains to be seen whether the reform will actually lead to a decline in the loss ratio. However, amid difficulties in increasing premium rates, it will be effective in preventing excessive insurance payments and raising premiums selectively. These measures will help improve products responsible for the recent rise in the loss ratio.
COVID-19 spread to help improve key operating indices
There is an increasing awareness of personal hygiene in the wake of the COVID-19 outbreak. With people avoiding outdoor activities, we expect to see a decline in the number of accidents and hospital visits, thus resulting in a reduction of insurance claims. The heavy portion of new business acquisitions through GA (general agents) should also shrink on lower preference for face-to-face interaction. In all, loss ratio and expense ratio should stabilize going forward.
Non-life in favor over life insurers; top picks are Hyundai M&F, and DB Insurance
Key operating indices are likely to improve thanks to the FSC’s reform measures and COVID-19 fears, helping to raise expectations for the improvement of nonlife fundamentals. Valuations of non-life insurers under our coverage are undemanding, trading at historical lows with the combined 1-year forward PBR down to 0.54x. We thus favor non-life insurers over life insurers.
We recommend Hyundai Marine & Fire Insurance and DB Insurance as our top picks in view of their relatively high earnings sensitivity to the structural reform and the COVID-19 outbreak. Our second top pick is Samsung Fire & Marine Insurance as the only non-life insurer expected to see ordinary profit growth this year.