"What is IFRS17?"... Insurance Companies Unable to Gauge First Report Card

Insurance Companies Apply New Accounting Standards from 1Q Results
Reluctance Over Changed Standards... Earnings Forecasts Difficult Even in Securities Sector

As the first quarter earnings announcement period approaches, insurance companies are becoming busy. This is because they have to present results applying the new accounting standard IFRS17 for the first time. With the criteria for evaluating various indicators such as liabilities and profits changing, there are reactions both inside and outside companies that it is difficult to gauge the new report card.

According to the industry on the 12th, insurance companies plan to announce earnings applying 'IFRS17' starting from the first quarter of this year. IFRS17 evaluates all risks included in insurance liabilities and reflects them in the financial statements. In addition, liabilities are measured at fair value rather than cost. The concept of Contractual Service Margin (CSM), which recognizes future profits generated from insurance contracts annually, has also been introduced. Savings-type products recognized as liabilities are evaluated at fair value, increasing volatility. While the fundamental strength of companies will not change significantly, the profit and loss recognition structure and the composition of financial statements themselves will change.

In particular, IFRS17 is regarded as one of the most demanding standards among various international accounting standards. It took more than 20 years for the International Accounting Standards Board (IASB) to complete IFRS17. Considering that it usually takes 5 to 6 years to create accounting standards, it is seen as a complex standard that required more than three times the usual time. Shin Byung-oh, Insurance Industry Leader at Deloitte Korea Group, pointed out, "Without analyzing the relationship between liabilities predicted for the future and current profit and loss statements, perfect matching of assets and liabilities, and subdividing financial accounting to the level of management accounting, it is impossible to trace the sources of profit and causes of volatility," adding, "This is the part where insurance companies feel the greatest burden when applying IFRS17."

Therefore, the industry is paying close attention to the first report card. A representative of a large insurance company explained, "Since each product has different maturity dates and subscription times, there is a lot of detailed work to break down the data to reflect it in the results," adding, "The company itself is not changing, but since the framework for viewing results is changing, it is difficult to gauge how this performance compares to previous years." Smaller and medium-sized companies are in an even more strained situation. A representative of a medium-sized insurance company revealed, "Large companies can prepare comfortably by assembling a large financial workforce, but small and medium-sized companies are so small in scale that they are very short-handed," adding, "Sometimes when new contracts are secured, they are criticized for just increasing the workload."

The securities industry is also showing reluctance. It has become difficult to gauge growth compared to the past as the criteria for evaluating performance have changed. Although securities firms predict that non-life insurance companies with more protection-type insurance, rather than savings-type insurance recognized as liabilities under IFRS17, will be somewhat advantageous, they are struggling to present detailed earnings forecasts. Some large companies such as Samsung Life Insurance disclosed results applying IFRS17 when announcing last year's earnings, but since the CSM application criteria differ by company, it is difficult to use them as a standard.

An analyst in charge of the financial sector at a securities firm said, "We are having difficulties internally, and analysts outside are finding it even harder to gauge," adding, "We have no clue which earnings estimation model to use or what basis to present, so everyone is hesitant to make premature earnings estimates."

However, there is also advice that once this 'growing pain' is overcome and IFRS17 is settled, investors will be able to understand companies more clearly. Kim In, a researcher at BNK Investment & Securities, explained, "If liabilities are measured at fair value, capital will increase, reducing situations where companies have to raise capital or reluctantly sell real estate to strengthen capital due to solvency ratios," adding, "The company itself remains the same, but unnecessary costs to meet regulations disappear, making it easier to compare 'capabilities' going forward."