"Confusing New Accounting Standards for Insurance Companies Explained This Way"... Financial Supervisory Service Details Criteria

Clearly Establish Detailed Standards Related to IFRS17 and K-ICS

The financial authorities have presented detailed standards and guidelines on items that are causing concerns in the field regarding the new accounting standards (IFRS 17) and the new solvency regime (K-ICS) applied to insurance companies. It is evaluated that criteria such as the recognition of available capital for capital securities and the discount rate for calculating the Contractual Service Margin (CSM) have become clearer.

On the 11th, the Financial Supervisory Service (FSS) announced that it held a practical consultation body the day before to interpret contents that are difficult to apply in practice so that insurance companies can stably settle into the new accounting and soundness systems.

At the meeting, results of reviewing practical matters and industry suggestions obtained through the 'New System Inquiry Response System' were shared, and opinions from the insurance industry and related institutions were exchanged.

The newly introduced K-ICS from this year includes newly established 'available capital recognition criteria.' Accordingly, how to handle capital securities became a concern for insurance companies. Under the previous Risk-Based Capital (RBC) system, hybrid capital securities were classified as core capital and subordinated bonds as supplementary capital without separate recognition criteria.

To prevent such confusion, the FSS required insurance companies to recognize the available capital recognition criteria in advance before issuing capital securities and to clearly reflect them in the issuance conditions. The requirements for core capital stipulate that dividends (including interest) must be paid within the limits of distributable profits under the Commercial Act, and full discretion over dividend payments must be retained. For supplementary capital requirements, there must be no dividend payment conditions linked to credit ratings or financial status that could accelerate insolvency or conditions that impair capital nature.

The FSS also clarified the credit rating application criteria related to reinsurance contracts under K-ICS. Referring to overseas cases, it interpreted that the FSR (Financial Strength Rating, a credit rating evaluating an insurer's ability to pay claims) can also be used when measuring credit risk related to reinsurance contracts.

Regarding the Contractual Service Margin (CSM), which has emerged as a key indicator, the FSS presented application methods. With the introduction of CSM, insurance premiums and expected profits are not recognized all at once but are recognized annually as insurance operating profit. Since there was no existing supervisory standard on the timing of discount rate application, the FSS clarified this. First, the timing of discount rate application is given discretion to the head office to choose within three months, but consistent criteria must be applied at each settlement, and internal control procedures such as documentation must be established.

The calculation standards for surrender value reserves were also unified. If the market value of insurance liabilities is less than the surrender value, the insurance company must reserve the shortfall as a surrender value reserve within capital. Until now, the calculation standards for surrender value differed by insurance company, such as surrender-type reserves or surrender values payable to policyholders upon cancellation. The FSS interpreted the standard to use surrender-type reserves when calculating surrender values on this occasion.

An FSS official explained, "We will continue to hold quarterly practical consultation bodies to listen to practical suggestions from the insurance industry regarding the new system," adding, "Through this, insurance companies will be able to reduce trial and error and improve work efficiency."

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