Best’s Special Report: South Korea Insurers Prepare to Face New Accounting and Solvency Rules

AM Best views South Korea’s non-life insurers as being in a better position than their life counterparts to weather the impact of the International Financial Reporting Standards 17 (IFRS 17) accounting standard and K-Insurance Capital Standard (K-ICS) solvency regime when they take effect.

In a new Best’s Special Report, titled, “South Korea Insurers Prepare to Face New Accounting and Solvency Rules,” AM Best states that the simultaneous implementation of the two frameworks by 2022 is likely to take a heavy operational toll on the market. Additionally, insurers face a pressing need to revamp business strategies, as companies will need to restructure product mixes and investment portfolios, as well as raise capital under the new accounting and solvency regimes.

The implementation of IFRS 17 will fundamentally change the accounting view on the valuation of insurance contracts and profit recognition. In addition to the full adoption of IFRS 17, the Financial Supervisory Services also intends to have the industry simultaneously adopt K-ICS, a new solvency regime. The aim is not only to align current solvency requirements with the new accounting standard, but also to adopt a more advanced yardstick to regulate the financial soundness of South Korea’s insurance industry.

According to the report, one of the unique features of South Korea’s non-life insurance market is that non-life insurers can sell long-term insurance products, and as a result, their business largely overlaps with that of life insurers. Almost 70% of the non-life industry’s total direct premium income is generated from the long-term insurance business, which includes personal lines products such as health, personal accident, savings and annuities. This blurred distinction between life and non-life insurance creates cross-segment competition in the health, savings and annuity segments.

AM Best expects the new frameworks to lead to greater volatility to liabilities on insurers’ balance sheets as market rates fluctuates. In contrast to other markets where the impact of new accounting standards falls mostly on the life segment, in South Korea, the issue will also apply to the non-life segment, given the large books of long-term insurance business non-life insurers hold. However, non-life insurance companies should bear a relatively limited impact, having had a shorter history of selling long-term insurance and being less aggressive than their life counterparts in pushing savings-type products.

AM Best is of the view that the K-ICS will place a heavier burden on capital—introducing more volatility to available capital and required capital on companies—than the current solvency regime. Like IFRS 17, the K-ICS regulations are expected to have less impact on non-life insurers than life insurers due to the smaller portion of high fixed-guarantee business book held by the non-life segment; the degree of impact will vary by company, depending on a number of factors including their business portfolio and asset-liability duration mismatches.

Nonetheless, the introduction of IFRS 17 and K-ICS provide insurance companies with the impetus and opportunity to restructure their business mix, improve their long-term profitability and to streamline internal processes. In addition, while the change in accounting standard, per se, is unlikely to directly impact insurers’ credit ratings over the short term, the impact on an insurance company’s strategy and operational behavior initiated by the new standards could affect a company’s credit profile over the mid to longer term.

Despite potential financial burdens that may stem from the preparation to implement IFRS 17 and K-ICS, AM Best believes that overall, insurance customers will benefit from the enhanced financial soundness of the overall insurance industry over the long term.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=288969.

AM Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.

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