A Fitch Ratings report has estimated insurance losses from the severe floods in South Korea will place pressure on the financial performance of the country’s non-life insurers.
Industry estimates indicate that insurance claims from the flooding are likely to exceed KRW 150bn, or less than 0.2% of Korea’s entire non-life direct premiums written in 2021.
Fitch expects 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.
According to the General Insurance Association of Korea, twelve motor insurers received more than 9,100 cases of motor damage claims as of 11 August, with an estimated loss of KRW 127bn.
The torrential rain, which started on 8 August, has registered the highest hourly rainfall figures since Korea’s weather observations commenced more than 100 years ago.
Heavy rainfall has caused unprecedented flooding in various parts of Seoul, Gyeonggi Province and Incheon, with the Gangnam area being one of the most heavily affected. The flood has damaged motor vehicles and properties, paralysing the train and subway services in the impacted areas.
Fitch notes that it is becoming increasingly critical for insurers and reinsurers to be equipped with appropriate risk-modelling or catastrophe-management frameworks as climate patterns evolve to quantify potential natural hazard losses for selection, underwriting, premium pricing or capital management.
Flooding losses stemming primarily from motor vehicle damages will be material to the non-life insurance industry as estimated claims continue to develop, Fitch suggests. The motor business constituted about 21% of total non-life premiums written in 2021.
The average risk-retention ratio for the motor business of the non-life insurers was 92% in 2021. The report states that direct insurers may have to absorb larger claims if they have not planned for catastrophe coverage on their portfolios.
The average regulatory risk-based capital ratio for the non-life industry was 210% at the end of March 2022, above the regulatory minimum of 100%. The availability of a capital buffer varies from company to company, and would also provide some much-needed relief to cushion flood losses.
Additionally, Fitch says that the Korean government is considering providing financial help and personnel assistance to cities to hasten recovery efforts. It would also call for further improvements to existing flood-management systems, including building better drainage systems and enhancing flood-prediction technologies.