U.S. Firms Push to Compete in S. Korea Insurance Markets
American demands for an opportunity to sell life and fire insurance here reached such an intensity that President Reagan last month ordered the Office of the U.S. Trade Representative to investigate unfair trade practices in the Korean insurance business.
But the reasoning behind the move is puzzling the South Korean Ministry of Finance, the U.S. Embassy and even representatives of American insurance companies here, who say Korean cultural bias against insurance and other factors makes the market anything but lucrative.
“The Korean insurance industry is just not very developed, and any American firm coming in here could not expect to make profits for at least four or five years,” said Graham A. E. Salmon, resident director of First Fire & Marine Insurance Co., a joint venture involving Continental Corp. of New York and Korean Explosives Co.
Although South Korea has a treaty obligation to treat all U.S. firms in all industries in a non-discriminatory manner, it has maintained a ban on American firms selling life insurance to Koreans and has excluded them from the most lucrative portion of its fire insurance market.
An American source here, who asked not to be identified by name, said there has long been a demand for South Korea to open its insurance field to foreign competition. But the source added that this is just one in a long list of steps that the United States wants South Korea to take in opening its markets. The goal is to correct an imbalance in U.S. trade with South Korea that reached $4.1 billion last year.
When Reagan announced the investigation of alleged unfair South Korean insurance practices on Sept. 7, the U.S. Embassy here did not even have an official designated to deal with the insurance question. (Also on that day, Reagan ordered probes into the Japanese tobacco market and the market for computers and related products in Brazil.)
Salmon said American insurance firms could be interested in South Korea only in the hope that, in the long term, the Korean people will drop their traditional belief that families, not insurance companies, should be relied upon in times of crisis.
Even in non-life insurance--in which American firms are free to sell everything except fire insurance on tall buildings--Salmon described business here as minuscule. In fact, Salmon said he was not sure why his company had invested in a non-life joint venture here, since it “is not making a profit and is not paying any dividends.”
Paik Won Ku, director of the Finance Ministry’s Bureau of Securities and Insurance, said: “We don’t understand why American companies want to enter our life insurance market.”
He said he was surprised by the President’s order to investigate unfair trade practices in the Korean insurance business.
No one here--not Salmon, not the Finance Ministry, not the U.S. source--seems to know of any American firm interested in entering the non-life insurance market here, though Reagan mentioned fire insurance as one of two areas of the South Korean insurance industry that should be opened to American firms.
Patrick Dutrey, representative of American Home Assurance Co., a subsidiary of American International Group, which is reputed to be putting most of the pressure on the White House, refused to be interviewed.
The President’s action has suddenly moved insurance to the fore among U.S.-South Korean trade questions. The focus of the investigation ordered by Reagan is clearly on life insurance.
Six Korean firms now monopolize the business in the growing, but backward, life insurance sector here. Premiums collected by the six Korean firms and by 13 non-life insurance firms increased from $1.5 billion in 1980 to $4.6 billion last year, with $3.6 billion of the total representing life insurance.
The life insurance industry, however, continues to suffer from widespread cancellations. Last year, the six Korean firms sold policies insuring clients for $50 billion, but policies insuring other clients for $47.7 billion were canceled.
According to Paik, the insurance bureau director, most of the cancellations come before enough premiums are paid even to equal the commissions paid to the agents.
Economically, South Korea is expected to rank soon among the advanced industrialized nations of the world, but its people cling tenaciously to ancient customs. Theirs is one of the world’s strongest family systems, with intricate moral obligations reinforced by law. Just as individual South Koreans turn to relatives--not banks--for loans, they look to relatives--not insurance companies--in times of crisis. General public awareness of insurance is so low here that there is still no unemployment insurance system, nor has any political pressure been put on to establish such a system.
Paik said only 29% of South Korean families have invested in life insurance, up five percentage points in the past decade. This, he said, compares to 89% in Japan as long ago as 1973.
It is not that the insurance companies have not been trying. About 150,000 agents, one for every 99 economically active Koreans 14 years old or more, are trying to sell life insurance.
But agents’ incomes are so low that only young women, many with only a junior-high school education who stay in the business less than a year, take insurance sales jobs, Paik said. Women make up 94% of the sales force, he said.
“Insurance in South Korea is an industry with low social standing, and you won’t find talented men with ambition going into it,” he said. “The agents visit their relatives, friends or neighbors, who can hardly say no to buying a policy. But after paying one premium, they cancel the policy.”
Speculation in real estate, losses from overseas reinsurance, under-the-table rebates that cut premiums below Finance Ministry-approved minimums and preferential loans to sister firms in the large chaebol-- conglomerates--that operate many of the insurance companies have also weakened the industry. Premiums fixed by the Finance Ministry at levels too low to provide enough money to pay claims--especially in casualty and auto insurance--have hurt, too.
Four of the six life insurance firms have been suffering losses for years, Paik said.
Used as ‘Cash Cows’
“The life insurance firms are used as ‘cash cows’ by the chaebol and are milked by owners of the big groups,” Salmon said, adding that the owners often rake off profits from real estate deals that leave the companies showing a loss.
“With all products and premiums the same (because of Finance Ministry regulations), you have to compete in services, or by using corporate connections and personal connections, or by loans (given in exchange for the purchase of insurance policies),” Salmon said.
The non-life insurance business in Korea, in which three foreign firms have entered joint ventures as minority partners with Korean companies, is as undeveloped as the life insurance sector, Salmon said.
There are only slightly more than 1 million cars, trucks and buses in South Korea, but the auto insurance segment is the largest of the non-life insurance business simply because the government has made auto insurance compulsory. Until 1984, however, the two wholly owned foreign insurance companies operating here, American Home Assurance and Cigna Insurance Co., were forbidden to sell auto insurance.
Fire insurance is mandatory only on buildings four stories or taller--the category from which the American firms are excluded--and on buildings housing theaters, markets and schools. Last year, South Koreans paid only $96 million in fire insurance premiums, underscoring the fact that the vast majority of buildings carry no insurance at all.
“If we don’t force building owners to buy insurance, many won’t buy it,” Paik said.
Even for mandatory fire insurance, firms here last year earned a mere $30 million from premiums.
Asked why South Korea was reluctant to allow American firms to enter the market if prospects for their success were so poor, Paik said: “The market is already saturated.” But Salmon said: “I don’t believe that for one minute.”
Plans Under Way
Even before Reagan’s announcement, the government had been planning to remove most of its controls on the industry and to allow competition, both among new firms and in the premiums and types of policies offered, Paik said.
But the Finance Ministry has not publicly set a schedule for liberalization and has not decided whether it will, Paik said, now that Reagan has initiated the unfair trade practice investigation.
Salmon and the other U.S. source predicted that the government will announce a timetable for liberalization by the end of the year. The question is whether Washington will consider that timetable acceptable.
Clayton Yeutter, the U.S. trade representative, has indicted that talks with the South Koreans on the insurance question will begin by the end of this year.
