Insurance Companies Busy Stockpiling Funds Amid Accounting System Changes

[Asia Economy Reporter Changhwan Lee] Domestic insurance companies are drawing attention as they are rushing to increase capital in response to new accounting standards to be applied from next year. This is because applying the new accounting standards will value liabilities at market value, which could deteriorate capital soundness.

Recently, with interest rates rising, the valuation gains on held bonds are also falling, increasing concerns about capital soundness, which is another reason insurance companies are urgently pushing for capital expansion.

According to the insurance industry on the 31st, Hanwha Life held a board meeting on the 24th and decided to issue subordinated bonds worth 300 billion to 500 billion KRW. Hanwha Life also issued foreign currency subordinated bonds worth 900 billion KRW in January. Hanwha Life is also pursuing the sale of its office building located in Dongdaemun-gu, Seoul, to increase capital.

NH Nonghyup Life also decided to issue subordinated bonds worth 600 billion KRW on the 24th, and Hanwha General Insurance issued subordinated bonds worth 250 billion KRW on the 7th of this month. DB Insurance decided to issue subordinated bonds worth 499 billion KRW in June last year, and KB Insurance decided to issue subordinated bonds worth 379 billion KRW early last year.

The reason insurance companies are consecutively increasing capital is that the standards for evaluating financial soundness will be strengthened from next year. Financial authorities plan to introduce new accounting systems such as IFRS17 (Insurance Liabilities Market Valuation) and K-ICS (New Solvency Regime) for insurance companies starting next year.

In particular, with the introduction of IFRS17, the basis for insurance liabilities will change from cost to market value, which may increase insurance company liabilities. If liabilities increase, the solvency ratio (RBC), which is the capital soundness standard for insurance companies, may decrease. Financial authorities consider insurance companies with RBC below 100% as insolvent and recommend maintaining at least 150% or higher.

However, as of the end of last year, Hanwha Life's RBC was 184.6%, Hanwha General Insurance's was 176.9%, KB Insurance's was 179.6%, and NH Nonghyup Life's was 210.6%, all below or similar to the industry average (205.5%). With the new system introduced next year, the RBC ratio could decrease further, which is interpreted as the reason for the urgent capital expansion.

Recently, the urgency has increased with the rise in the base interest rate. When interest rates rise, the value of existing held bonds falls, and bond valuation gains decrease, tending to lower the RBC. Since the Bank of Korea is likely to raise the base interest rate further this year, the decline in RBC is expected to accelerate.

With growing concerns about capital soundness, insurance companies have also requested help from financial authorities. It is reported that major insurance companies conveyed their concerns about the introduction of the new accounting system and requested direct support during a private meeting with the Financial Supervisory Service Commissioner held on the 24th.

Financial Supervisory Service Commissioner Jeong Eun-bo said to reporters after the meeting, "Insurance company executives were very worried about the introduction of IFRS17 and K-ICS," adding, "Insurance companies need proactive capital expansion along with sufficient provisioning for bad debts."

The Financial Services Commission and the Financial Supervisory Service plan to operate a practical consultative body for supporting insurance companies' new system implementation until the end of March 2024.

A Financial Supervisory Service official explained, "There are significant differences in the preparation status and response levels for the introduction of the new system among insurance companies, and inquiries (or suggestions) about the new system are expected to increase gradually, so we formed a practical consultative body."

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