IFRS17 Delayed for Another Year... Insurance Companies Can't Smile Despite Good News

Relieved from Capital Increase Burden

But Zero Interest Rate Shock Amid Weak Business Conditions

New Capital Securities Issuance Expected to Continue

[Asia Economy Reporter Oh Hyung-gil] The introduction of the new International Financial Reporting Standard (IFRS17), originally scheduled to be implemented for insurance companies from 2022, has been postponed by another year. Insurance companies, which were burdened by capital expansion due to the increased size of liabilities compared to the existing accounting methods, can now breathe a sigh of relief. However, with the ongoing sluggish business conditions and unprecedented zero interest rates, insurance companies are facing a crisis of survival.

According to the Korea Accounting Standards Board and the insurance industry on the 18th, the International Accounting Standards Board (IASB) decided on the 17th (local time) at a board meeting held in London, UK, to delay the implementation of IFRS17 by one year. Accordingly, IFRS17 will be enforced from January 1, 2023.

IFRS17 was originally scheduled to be introduced in 2021. However, many member countries requested a delay citing insufficient preparation. Ultimately, the IASB board postponed it by one year last year and has now decided to delay it again. The IASB board consists of 14 members from the US, China, the UK, Germany, France, Australia, Japan, Korea, and others, with 12 members supporting the postponement. IASB plans to announce the final revised standard of IFRS17 in June.

The purpose of introducing IFRS17 is to evaluate whether insurance companies can properly pay insurance benefits at specific future points in time as desired by customers. It aims to reflect international accounting standards instead of the current insurance accounting peculiarity of comparing current premiums and future insurance payments.

The most significant feature is that insurance companies will change the evaluation basis of insurance liabilities from cost to fair value. In a declining interest rate environment, the fair value evaluation significantly increases insurance companies' liabilities, which raises the required capital and lowers the solvency margin ratio (RBC ratio). As a result, insurance companies inevitably face increased burdens to raise capital to improve the RBC ratio.

This burden is especially heavy for life insurance companies, particularly large ones. Since they sold many savings-type products guaranteeing high-interest rates in the past, the rapidly increasing liability burden is substantial. NICE Credit Rating estimated the additional reserve burden for domestic life insurers' insurance liabilities at 73.5695 trillion KRW. Among this, the burden of the three major companies?Samsung Life, Hanwha Life, and Kyobo Life?was evaluated at 56.043 trillion KRW, accounting for 76.18% of the total.

Following this decision, the insurance industry will gain time to secure capital and build accounting and settlement systems. It is expected that the issuance of hybrid capital securities and subordinated bonds will continue to raise capital. Earlier this year, in January, Tongyang Life decided to issue overseas hybrid capital securities worth up to 300 million USD.

Additionally, there are expectations that the application timing of the new solvency regime (K-ICS) will also be delayed by one year. The financial authorities had adjusted the K-ICS application schedule when the IFRS17 implementation year was postponed to 2022.

As life insurers prepare for the introduction of IFRS17 and K-ICS by promoting the expansion of protection-type insurance sales, they are expected to be passive in selling savings-type insurance, which will also affect consumers.

Experts advise that insurance companies should actively seek ways to restructure liabilities and transfer interest rate risks. Choi Won, Senior Researcher at the Korea Insurance Research Institute, said, "Liability structures should be converted through contract transfers and contract buy-back methods, and it is necessary to transfer or hedge interest rate risks using reinsurance and interest rate derivatives." He added, "Financial authorities should also prepare policies to activate related systems."

This content was produced with the assistance of AI translation services.