The South Korean market is highly saturated and competitive, dominated by large local incumbents. Nevertheless, the South Korean market saw 10 percent compound annual growth between 2002 and 2007, despite an almost fully saturated market, with household penetration of 90 percent and life insurance premium equivalent to 8.8 percent of GDP - third only to Taiwan and Hong Kong in Asia.
One of the major demand trends in this market is the growth of investment and retirement products driven by the aging population. A 2007 McKinsey survey shows that most people in South Korea feel they are not sufficiently prepared for retirement and that existing products do not meet their needs. Meanwhile, the impending introduction of the Capital Market Consolidation Act (CMCA), which comes into force in 2009, has spurred considerable excitement and made consumers more comfortable about buying investment products.
In terms of the competitive landscape, South Korea is the only Tiger nation to have seen its dominant players significantly challenged by newcomers who have been able to wedge their way into the market. The incumbents have traditionally relied on the legacy housewife-dominated agent distribution system for decades, influenced by the Japanese model.
Over the past few years, foreign companies and smaller local attackers were able to develop a more professional sales force or new channels that were better able to sell the newer investment products and consequently grabbed market share. This has not gone unnoticed by the Big 3 South Korean players - Samsung Life, Kyobo, and Korea Life - who have been fighting back to avoid losing an even greater proportion of market share. However, given their legacy sales force models, they will have tremendous difficulties in professionalizing their sales forces and introducing more sophisticated products. Medical Insurance In South Korea
The housewife sales force simply lacks the capability to sell more sophisticated products. Over the years, they have accumulated a large customer base on the basis of their strong local relationships. The Big 3 appreciate the need to both downsize and professionalize their agency forces but the transition is very difficult. While they understand the long-term imperative of doing this, they worry about diminished market share during the transition process. The pain of this trade-off has even led to some reversal of downsizing programs, pitting the reformers against the traditionalists.
Meanwhile, market share losses for these incumbents have been significant. In 2002, the Big 3 accounted for 77 percent of first-year premium; by 2007, their combined premium share dwindled to 44 percent by first year premium. The Big 3 lost share in almost every single product category, from whole life to variable.
Even in the miniscule group-life segment, where 2006 premium was only US$1.3 billion, the Big 3 slipped from having 94 percent of the market to 87 percent. How did this happen? The large incumbents kept to their historical strengths - traditional whole-life and term-life insurance via housewives channels, while the market had moved towards variable products, the bancassurance channel, and a more professionalized sales force. Variable products and bancassurance were introduced to the marketplace in 2001 and 2002 respectively. The growth has been very significant. By 2007, variable products accounted for 23 percent of gross premium and pure endowment accounted for 19 percent.
So who gained market share? Primarily smaller players, many of whom were foreign entrants. For example, the market share of ING grew from 1.4 percent to 5.9 percent between 2001 and 2006. And a handful of local players, such as Shinhan, which grew its market share from 1.8 percent to 3.3 percent during this period.
As such, one of the keys to the future of the South Korea life insurance industry lies in the growth of the smaller, more aggressive new players, who brought investment-linked products to the market and introduced distribution through banks. This distribution channel accounted for almost 50 percent of first-year premiums in 2006. The economic revival after the credit crisis and collapse of the dot-com bubble helped the South Korean life insurance market take off after 2003, growing by 10 percent annually after four years of near-zero growth from 1999 to 2003.
In addition to bancassurance, South Korea, like Japan, is pioneering interesting new distribution channels, of which the prime example is home-shopping TV sales, (life insurance is sold on television by an agent, with the support of call centers). Another innovative example is Mirae Asset Group - this up-and-coming player was the first to combine life assurance with investment centers and is positioning itself to lead the wave of professional financial planning. Medical Insurance In South Korea .
While Mirae has had early success in experimenting with new distribution channels, Samsung Life's challenges could not be more different. The life insurance subsidiary of South Korea's biggest chaebol, Samsung Life, has been grappling with the problems of change after decades of dominance. In many ways, Samsung Life is also representative of the Asia incumbents who are confronting a changing competitive landscape of life insurance.
As long as the market maintains an appetite for investment products foreign players are likely to continue gaining share. While domestic players will be able to replicate the foreigners' product offerings, the international companies have advantages that make them better able to market these products (for example, international experience and superior sales forces) which are unlikely to disappear in the near term, As in other Asian markets, the foreign players have been successful in attracting younger and more qualified sales forces. It is extremely challenging for domestic companies to acquire college graduates as members of their sales forces due to an image as "housewives" oriented and a lower compensation level.
Besides investments, the pension market also provides an attractive opportunity in South Korea. Aside from Japan, no Asian nation is aging as fast as South Korea. The government is committed to pension reform and many private pension schemes are being established. This will attract a great number of companies keen to enter this market, including insurers and asset managers. Contenders for market share will have to build sales forces with the credibility to sell these plans and they will need the right products. Armed with these attributes the companies need to position themselves as a retirement brand.
So what does the future hold for South Korean players? Part of the answer lies in the future sales of investment-linked products and the fast developing retirement market. If investment products were to fall out of favor, foreign insurers could be faced with a slowdown in sales, given the small proportion of traditional products in their current mix of offerings. This may not be fatal, however, since the life insurance business has been through these cycles many times before. The quality of the sales forces will determine the speed at which they can adapt to different equity market environments and switch to other more conservative products.
Will incumbents fight back or at least halt the erosion of market share with new products and distribution methods? They need to do something, having faced five years of erosion by newer players who, like themselves, are operating in a market that is showing a slower rate of growth. It is difficult to be bullish about the Big 3 incumbents. Slowed by decades of inertia and legacy issues, they have yet to aggressively launch fundamental reform programs to halt the slow decay of their market share. While they cannot be written off (it is probable that one or two out of the group will be successful in their transformation), as a group, they will continue to witness a decline in their traditional dominance of the industry.
Overall though, the fundamental growth prospects in the South Korea market remain positive. It is estimated that premiums will expand by 5 percent annually until 2012. While the market is on a slightly slower growth trajectory than before, the prospects remain quite attractive for many of the attackers in the market. This is a market poised for drastic change - in 10 years, it will not be surprising at all to see the competitive landscape quite different from the one we see today. The winners will be those that can continue to best serve the increasingly sophisticated and aging customers. To find out more, you can check out Medical Insurance In South Korea.
