Finance officials, insurers brace for new rules

Financial authorities joined forces with local insurance companies on Wednesday and launched a task force to prepare the local industry for the implementation of a new accounting model for insurance contracts known as International Financial Reporting Standards 17.

The Financial Services Commission on Wednesday held a meeting in Jung District, central Seoul, with CEOs of local insurance companies to officially launch a preparation committee. The committee led by Kim Hak-kyun, a commissioner of the FSC, and joined by academic adviser and executives from 38 local insurers, will oversee the companies’ adjustment to the new guidelines. The International Accounting Standards Board is expected to reveal the regulations, IFRS 17, also known as IFRS 4 Phase II, for insurers in May before they take effect on Jan. 1, 2021.

“The crux of IFRS 17 is re-evaluating liabilities of insurance companies based on current interest rates rather than fixed rates,” Kim of FSC said at the meeting. “Such procedure is desirable since it will provide a fair way to assess the insurers’ ability to cover the benefits to the policy holders.”

The commissioner, however, admitted local insurers will be left vulnerable to the shift unless they are prepared to embrace IFRS 17.

Under the new practice, liabilities of local insurers will expand substantially. The Bank of Korea said in the latest financial stability report that fixed-rate policies make up the majority of the policies sold in the past. When readjusted based on the current rate, which has plunged recently, the size of liabilities will inevitably increase, the report noted.

Life insurance companies will especially be affected by the new IFRS 17. According to a Korea Insurance Research Institute report, about 43 percent of life insurance policies are based on fixed rates, compared to 7 percent for general insurance companies.

“The strengthening of financial regulation after the global financial crisis such as IFRS 17 … requires insurers to adjust their corporate strategy and goals,” said the report, adding that the new rules will put more pressure on local insurers to rake in additional capital.

The BOK report speculated the liabilities of life insurers will balloon by 23 trillion ($19.99 billion) to 33 trillion won under the new rule, which they will have to offset. Some insurers are already on the move. Allianz Life Insurance, for instance, raised 50 billion won last year through issuing new shares.

BY CHOI HYNG-JO [choi.hyungjo@joongang.co.kr]