[Square] Insurance Industry Innovation Stemming from IFRS17

Published 09 Jul.2021 14:35(KST)

Noh Geon-yeop, Research Fellow at the Insurance Research Institute

Recently, financial authorities and the Accounting Standards Board have confirmed and announced the domestic implementation date of the new international accounting standard for insurance contracts, IFRS17, as January 1, 2023. Although the implementation date is January 1, 2023, financial statements as of January 1 of the following year must be prepared for comparison with past standards, leaving only about six months until the actual implementation, making thorough preparation essential.

IFRS17 is commonly known as a standard for fair value measurement of insurance contracts. Most discussions have focused on the fact that insurance contract liabilities will increase because past high-interest contracts will be evaluated at current low interest rates, leading to a decrease in capital and difficulties for the insurance industry.

However, the purpose of IFRS17 is to reflect the economic substance in the evaluation of insurance contracts and to provide transparent information about insurance companies to investors and financial statement users.

Currently, insurance liabilities are measured at cost, so the liability amount does not change according to market interest rates. In other words, the real value of insurance liabilities due to interest rate changes is not properly reflected. This causes assets and liabilities to not move in the same direction, increasing capital volatility.

Also, current insurance company financial statements do not reveal how much difference there is between expected and actual insurance payments, nor how much profit is generated from which products, making it difficult to estimate the level of potential future profits.

With the implementation of IFRS17, these issues will be largely resolved. When interest rates rise, not only assets but also insurance liabilities decrease together, allowing capital to be maintained at a stable level. Additionally, future profits from insurance contracts can be directly confirmed in the financial statements, and profits by insurance type can be identified, enhancing the transparency of insurance company information.

To prepare for IFRS17, insurance companies face the innovation challenge of minimizing capital fluctuations while maintaining stable insurance profits.

To minimize capital fluctuations, it is necessary not only to match the cash flows of assets and liabilities but also to implement liability restructuring measures such as contract transfers, contract buybacks, and co-reinsurance. This is because it is difficult to match cash flows with assets at current low interest rates when liability cash flows are based on past high interest rates.

Moreover, to maintain stable profits, assumption management is crucial. If insurance payments or refunds are made as expected when the insurance product was developed, profits can be maintained steadily; however, if there is a large difference from actual payments, profit fluctuations will be significant, making it difficult to maintain stable profits. To this end, insurance companies should conduct various analyses of assumptions through separate organizations such as an assumption management committee or assumption management department, and departments such as product, actuarial, and risk should apply consistent assumptions company-wide.

Meanwhile, the insurance industry is pursuing digital innovation through artificial intelligence (AI), big data, and other technologies. While the industry will grow through new product development and convenient service provision using these technologies, stable profit base establishment and capital management must accompany this for sustainable growth. It is important to recognize that innovation in the insurance industry starts first with IFRS17 before utilizing AI, big data, and other technologies, and to prepare accordingly.