Financial Services Commission: "Measuring Insurance Liabilities from 2023... at Market Value, Not Cost"

[Asia Economy Reporter Park Jihwan] The new insurance contract accounting standard, Corporate Accounting Standard No. 1117 (Insurance Contracts), will be implemented starting in 2023. This standard requires insurance companies to measure liabilities at fair value rather than cost.

On the 10th, the Financial Services Commission announced that it received the new insurance contract accounting standard, Corporate Accounting Standard No. 1117 "Insurance Contracts," from the Korea Accounting Standards Board and will enforce it from January 1, 2023. This follows the International Accounting Standards Board (IASB) finalizing the new International Financial Reporting Standard (IFRS 17) last June, which fully replaces the existing insurance contract standards.

The core of the new standard is changing the evaluation basis of insurance liabilities from cost to current value. Insurance liabilities refer to the reserves that insurance companies accumulate to pay insurance benefits to customers. In the past, insurance liabilities were measured using past information such as interest rates at the time of insurance sales, which has been criticized for not adequately reflecting the actual value to be paid to policyholders.

The new standard requires insurance companies to estimate all cash flows related to insurance contracts and measure insurance liabilities using discount rates that reflect assumptions and risks at the current reporting date.

The method of recognizing insurance revenue will also change from a cash basis to an accrual basis. Under the current insurance standard, companies apply a cash basis, recognizing insurance premiums received as insurance revenue immediately. This can cause a sudden increase in revenue if many policies are sold and premiums collected in a specific period, potentially failing to properly reflect the services provided to policyholders.

The new standard applies an accrual basis, recognizing revenue each fiscal year based on the services (insurance coverage) provided to policyholders. Recognizing insurance revenue at the time services are rendered allows for better comparability of financial information with other industries.

The Financial Services Commission stated that with the introduction and implementation timing of the new insurance contract accounting standard confirmed, market uncertainty has been resolved. It evaluated that the ability to easily distinguish insurance profit and loss from non-insurance profit and loss enhances the understandability of financial statements and comparability with other industries.

The Financial Services Commission emphasized, "Financial authorities will facilitate the smooth adoption of the new accounting standard by revising related laws and systems," and added, "Through the Insurance Capital Soundness Advancement Task Force, we will promptly finalize supervisory accounting and the new solvency regime (K-ICS) in line with the introduction of the new accounting standard."

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