Frequent replacement of chief executives at insurers under South Korea’s Taekwang Group has left Heungkuk Life Insurance Co. and Heungkuk Fire & Marine Insurance Co. to be trapped in the vicious cycle of stagnant revenue as it prevents them from planning long-term business strategies.

According to multiple sources from the insurance industry on Wednesday, the average tenure of chief executives at mid-tier Heungkuk Life Insurance and Heungkuk Fire & Marine Insurance is very short. As for Heungkuk Fire & Marine Insurance, nine chief executives filled in the post over the last 10 years since the insurer acquired Ssangyong Fire & Marine Insurance Co. in 2006. Only two of the nine officers filled in their official two year term.

Heungkuk Life Insurance was headed by six chief executives between 2005 and 2010, meaning that each officer’s term was less than a year. The insurer’s current CEO Kim Joo-yoon, who began his term in June 2014, is considered to be in the top spot for a relatively long period of time.

Considering that most chief executives at local insurance firms generally serve for two to three years and plus extension by one or two years, CEO positions at Heungkuk Life Insurance and Heungkuk Fire & Marine Insurance that are both units of Taekwang Group are unusually short-lived.

Such frequent changes in leadership deal a blow to a company’s performance. An unnamed official from the insurance industry said that frequent replacement of top management makes it hard for companies to plan long-term business strategies while leading them to focus on developing of high-risk products that can generate higher profit in the short term. As new leadership often comes up with new planning, it also leads to a rise in unnecessary spending. It is evident that such a vicious cycle would break a company in the long run.

According to the Financial Supervisory Service, Heungkuk Life Insurance posted a net profit of 39.1 billion won ($34.9 million) in the first six months of this year, down 52.3 percent from a year ago. The net profit of Heungkuk Fire & Marine Insurance has also plunged 41.9 percent to 9 billion won over the same period.

An unnamed official from Heungkuk Life Insurance said the company’s net profit fell as its spending on working expenses had increased with higher sales of term insurance products. Also, its premium payments increased compared with the past. The overall decrease in net income has led the market share of Heungkuk Life Insurance based on insurance sales to drop from 4.8 percent in the end of December last year to 4.6 percent in the end of June.

Heungkuk Fire & Marine Insurance, which has raised its indemnity insurance premium by 44.8 percent earlier this year, is still struggling to improve performance.

An unnamed official from the non-life insurance industry said that indemnity insurances are long-term insurances with a long renewal period and that it will take time before an increase in the premium would be reflected in the company’s performance. The official noted that without restructuring, it would be difficult for it to improve its overall business.

The stagnant results of Heungkuk Fire & Marine Insurance are more visible when comparing with other non-life insurers. According to the Financial Supervisory Service, non-life insurers’ net income in the first six months of the year increased 21.1 percent from a year ago. Industry observers blame the frequent leadership replacement at Heungkuk Fire & Marine Insurance as the main reason for its drop in net income.

The risk-based capital (RBC) of Heungkuk Life Insurance and Heungkuk Fire & Marine Insurance is also among the lowest in ranking compared to other insurers. According to a report released by the Financial Supervisory Service on Wednesday, the RBC of Heungkuk Life Insurance was 198 percent while that of Heungkuk Fire & Marine Insurance 151 percent, significantly lower than the industry average of 297.1 percent and 269.1 percent for life and non-life insurers, respectively. The RBC of an insurer is an index that shows how capable insurers are of providing premiums back to subscribers upon payment demand. The lower the figure, the less capable an insurer is in paying back subscribers their insurances.

Another official from the insurance industry who asked to be unnamed said that given the fact that the RBC of Taekwang Group’s insurance units is low, they are vulnerable in promoting steady long-term business.

Some in the industry doubt whether the Taekwang Group’s insurance units can build up loss reserves before the new accounting rule under International Financial Reporting Standards (IFRS) 4 Phase II takes effect in 2020. The new rule evaluates insurers’ debt that needs to be paid back to policyholders based on market value, requiring them to secure a large amount of capital in their reserves.

By Park Joon-hyung

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]