December 16th, 2008

Republic of Korea: Catastrophe Reinsurance Market 2008

Posted at 12:50 AM ET

Noh Sik Kim, Assistant Vice President

2008 Reinsurance Market Position

Natural Hazards Insurance

In May 2006, the Korean government’s National Emergency Management Agency (NEMA) introduced natural hazards insurance to substitute for ad hoc disaster relief, which has been raised and subsidized by the government whenever natural disasters occur. After a two-year trial period during which the scheme was run only in nine local designated areas, the new insurance-based system will operate on a nationwide scale starting 2008. It will provide farmers and stock breeders with cover for the loss of, or damage to farmhouses, greenhouses and barns arising from natural hazards like typhoon, flood, heavy rainfall, gale, wave, tidal wave and heavy snowfall. This program is also being subsidized up to 50 percent of net premium by both central and local government.

Specific Buildings

Property insurance is compulsory for those buildings with a floor area exceeding 3,000 square meters. The standard Korean fire policy must normally be extended to cover natural perils. With regard to specific buildings, however, natural perils cover had to be provided as standard and free of charge. The Korean insurance industry believed that this requirement greatly exacerbated losses from Typhoon Maemi, and the industry subsequently tried hard to have the rule changed. As of May 1, 2005, this requirement was removed and automatic free cover for natural perils was changed to optional cover for an additional premium. Industry participants expect that this will help reduce countrywide exposure to wind and flood over the coming years.

Proportional Treaties

Virtually all property surplus treaties in the market have imposed event limits, typically one to four times the single-risk limit. These event limits were maintained at 2008 renewals. Co-insurance clauses with per risk cession limits also remained a feature.

On average, treaty reinsurance commissions remained unchanged but treaties with deteriorating results experienced a reduction in reinsurance commissions. The cession limit remained unchanged or slightly increased.

Event Excess of Loss

Most program limits were maintained owing to no major changes in exposures, while some cedents purchased higher limit. As previously, most programs are split between risk and event, with some companies retaining combined risk and catastrophe layers at the top end of their programs. Deductibles remained virtually unchanged.

Reinsurers in London and Bermuda were again interested in quoting for Korean catastrophe business. However, actual cases of new participation or larger shares on existing business were fairly limited. As in previous years, much capacity was sourced from the Singapore reinsurance market, and competition for Korean catastrophe business still remains strong.

Catastrophe Exposure

The Republic of Korea is exposed to the major hazards of typhoon and associated flood. The country experiences one to three storms per year on average, with most events occurring in August and September. Since 2004 Korea has had relatively quiet years with almost no loss from typhoon or heavy rain. Typhoon Maemi, the worst catastrophe in the nation’s recent past, struck the southeastern part of the Korean Peninsular in 2003, causing insured losses of KRW650billion (USD 0.5 billion). Typhoon Rusa, the nation’s second worst recent catastrophe, hit Korea in 2002 and resulted in insured losses of KRW150 billion (USD 113 million).

Frequent rains also occur due to the East Asian monsoon. This weather system usually lasts for 20 days, during which time heavy rains and flash floods may result in extensive flood damage.

Korea’s exposure to earthquake is relatively low, as is its exposure to terrorism. Although North Korean agents have been disruptive in the past, it is considered unlikely that the Pyongyang government would use terrorist acts to disrupt Korean society.

Insurance Availability

Rates for windstorm and flood cover are based on loss cost estimates calculated by the Korea Insurance Development Institute (KIDI). Average rates rose marginally in April 2002, due to the introduction of a new rating system, and have increased further in 2005. Under the new system, rates are based on building type, area and construction class. There are three building types (residential, commercial, and industrial), seven geographic areas and four construction classes. A small compulsory deductible has also been introduced.

Wind damage and the subsequent inflow of rainwater are covered by the extended coverage endorsement to the standard fire policy. This endorsement does not provide flood coverage. An alternative wind and water damage clause covers windstorm, flood, and tidal wave. A growing percentage of insured property is covered on a property all-risk basis, which automatically includes windstorm.

While terrorism coverage is being curtailed, most insureds are not disturbed by its withdrawal since Korea is perceived to have a low exposure to terrorism threats. Terrorism coverage is absent in both property and commercial lines, and capacity for terrorism coverage is perceived to be generally unavailable. Terrorism coverage can be purchased as a coverage extension, but only a small number of insureds have done so.

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