Possibility of Conservative Revisions Such as Loss Ratio and Cancellation Rate
Decrease in Available Capital... Concerns Over Decline in K-ICS Ratio
Financial authorities are set to soon present guidelines on the new accounting standards for insurance companies. As the 'illusion effect' on performance caused by changes in accounting standards clears, there is a prospect that the soundness indicators of insurance companies may also change.
According to the industry on the 30th, the Financial Services Commission and the Financial Supervisory Service are expected to present guidelines on the new accounting standards for insurance companies within this week. This is to prevent confusion over the 'illusion effect' where insurance companies' first performance results of the year, announced since the introduction at the beginning of the year, show a significant increase without any particular reason.
In fact, with the introduction of IFRS17 from this year, the performance of insurance companies has markedly improved. Under the new accounting standards, expected future insurance profits are initially recognized as liabilities and then amortized and included as profits during the contract period. This has led to criticism that insurance companies have made favorable assumptions to make the loss ratio of indemnity health insurance or the lapse rate of no-surrender or low-surrender insurance appear higher in profits immediately.
The authorities are expected to set standards for various accounting assumptions through the guidelines to be announced this time. It is anticipated that these will be set somewhat more conservatively than the assumptions used by the industry. In this case, changes are expected not only in performance but also in the newly introduced soundness indicator from this year, the 'New Solvency Ratio (K-ICS)'.
K-ICS refers to the ratio of assets (available capital) to liabilities (required capital), similar to the existing Risk-Based Capital (RBC) system. The difference from RBC is that both assets and liabilities are measured at fair value. It is also expected that the guidelines will present more conservative standards for the Best Estimate Liability (BEL), one of the components of liabilities. In particular, to correct the underestimation of BEL, it is likely that the method will involve reducing the surrender refund reserves that must be returned to customers when they cancel their insurance. In this case, the available capital, which corresponds to the numerator, will decrease, causing the K-ICS ratio to decline.
Because of this, small and medium-sized insurance companies with significant capital soundness concerns are expected to become even busier. Although most small and medium-sized insurers have applied for transitional measures that allow up to a 10-year grace period for the introduction of K-ICS, they are likely to hurry capital expansion due to various conditions such as dividend restrictions. In fact, some insurance companies have already issued hybrid capital securities or subordinated bonds. Fubon Hyundai Life issued subordinated bonds worth 80 billion KRW last month. Hana Life also issued hybrid capital securities worth approximately 180 billion KRW in March. A representative from an insurance company said, "When the guidelines come out this time, we will have to review not only the performance but also the soundness indicators again," adding, "It is regrettable that such guidelines were not presented from the beginning."
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