Government Revises Enforcement Decree of Commercial Act to Allow Insurance Companies to Offset Unrealized Gains and Losses

The government is promoting a plan to exceptionally allow the offsetting of unrealized gains and unrealized losses when calculating distributable profits so that insurance companies can stably pay dividends to common shareholders.

Minister of Justice Han Dong-hoon Photo by Yonhap News

The Ministry of Justice announced on the 27th that it will publicly notify a revision of the Enforcement Decree of the Commercial Act based on this content.

The revision includes provisions allowing the offsetting of linked unrealized gains and unrealized losses related to transactions for purchasing government and corporate bonds to hedge interest rate risk on insurance liabilities, reinsurance transactions to transfer insurance contract-related risks, and insurance product transactions where insurance payments vary according to asset management performance.

The Ministry of Justice stated that once the Enforcement Decree of the Commercial Act is revised, "it will enable stable profit distribution by insurance companies and is expected to benefit common citizens, including shareholders who invest anticipating dividends."

This revision was promoted considering the impact of the new International Financial Reporting Standard (IFRS 17), which was fully implemented this year. The new standard evaluates insurance liabilities at fair value. Due to this change, insurance liabilities held by insurance companies have become sensitive to interest rates, increasing the possibility of larger unrealized gains and losses from valuation. Previously, insurance liabilities were evaluated at cost, so the valuation of insurance liabilities was not affected by interest rates.

Academia and industry also view that the new standard increases the interest rate volatility of long-term insurance liabilities borne by insurance companies, and that stable dividends to shareholders will become difficult due to the prohibition of offsetting unrealized gains and losses under the Commercial Act. The Ministry of Justice explained that it reflected these opinions.