Standards delay brings insurers capital reprieve

Korean insurers now have more time to improve their capital positions as the implementation of a new international accounting standard is being delayed.

According to the Korea Accounting Institute (KAI), the International Accounting Standards Board (IASB) voted on Wednesday to delay the implementation of IFRS 17 by one year to January 2022. The decision by the IASB, the London-based organization that sets international accounting standards, comes after insurers globally requested more time to prepare.

One of the most important changes the new standard is set to bring concerns liabilities. Unlike its predecessor, IFRS 4, IFRS 17 will measure insurer liabilities at market value instead of book value.

Insurers worry that the change in the calculation will lead to an increase in the size of their debts and a hit to profitability. To boost their capital and raise their risk-based capital (RBC) ratios, indicators of soundness, insurers have been pressured into issuing hundreds of millions of dollars worth of the riskier subordinated bonds as well as new stock from last year.

The delay comes as a relief to many insurers who now have more time to increase their capital. Smaller insurers have been facing difficulties in developing a proper accounting system that meets the new standards due to insufficient manpower and high costs.

Given IFRS 17’s delay, Korea’s financial authorities have also hinted they will consider delaying the introduction of the K-Insurance Capital Standard (K-ICS), a domestic insurance valuation standard that calculates RBC based on market value. Until now, the Financial Supervisory Service had responded to pleas from insurers to postpone the implementation of K-ICS, which was slated to go into effect around the same time as the IFRS 17, with little enthusiasm.

A few large insurers have already invested considerable sums into developing and operating accounting systems that comply with the new accounting standard, and they did not warmly welcome news of the delay.

“Though the extra year may provide us with an opportunity to improve our new accounting system, we will face additional costs from running both the old and new systems for a longer period,” said a manager of a large insurance company.

The government assured the industry that it will help insurers adjust to the new standards during this period of uncertainty.

“We will try to support insurers as much as possible so they do not face any difficulties in getting ready for the implementation of IFRS 17,” said a spokesperson for the Financial Services Commission.

BY KIM EUN-JIN [kim.eunjin1@joongang.co.kr]