IFRS17 Delayed to 2023... Insurance Companies Can't Smile Despite Good News (Comprehensive)

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), which was scheduled to be implemented for insurance companies starting in 2022, has been postponed by another year. Insurance companies, which had been 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 once again. The IASB board consists of 14 members from the US, China, the UK, Germany, France, Australia, Japan, Korea, and others, with 12 members voting in favor of 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's unique characteristic of comparing insurance premiums at the present time with insurance benefits at future points in time.

IFRS17 introduction has been promoted based on the judgment that international trust in domestic accounting transparency is declining. With the implementation of IFRS17, it is expected that the 'Korea discount' phenomenon, where domestic companies' financial statements are not properly recognized overseas, can also be resolved.

The biggest feature of IFRS17 is that insurance companies 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 insurance liabilities of domestic life insurers at 73.5695 trillion KRW. Among them, the burden of the three large companies?Samsung Life Insurance, Hanwha Life Insurance, and Kyobo Life Insurance?was evaluated at 56.043 trillion KRW, accounting for 76.18% of the total.

As of the end of the third quarter last year, the average solvency margin ratio (RBC ratio) of domestic insurance companies was 286.9%. Life insurers recorded about 301%, and non-life insurers about 260%. This is an increase of more than 25% compared to the average of 261% at the end of 2018.

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

There is also speculation that the application timing of the new solvency regime (K-ICS) will be delayed by one year. The financial authorities had adjusted the K-ICS application schedule even when the IFRS17 implementation year was postponed to 2022.

As life insurers adopt strategies to expand sales of protection-type insurance in preparation for IFRS17 and K-ICS introduction, sales of savings-type insurance are expected to be passive, 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 or contract buy-back methods, and it is necessary to transfer or hedge interest rate risks using reinsurance and interest rate derivatives," adding, "Financial authorities should also prepare policies to activate related systems."

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