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Affiliated insurers to face double task due to new accounting rules

Insurance providers that are affiliated with financial holding companies will have to keep a two-track record of their financial statements starting next year, due to upcoming changes in accounting ordinances, according to industry officials.

The dual system, which will be effective until 2020, is likely to weigh upon insurance subsidiaries, especially those with low levels of capital reserves.

Following a decision by the International Accounting Standards Board earlier this year, the financial industry is to be subject to a new set of International Financial Reporting Standards, or IFRS9, starting January next year.

The given standard seeks to offer a way to report financial instruments at fair value, reflecting impairment of financial assets and hedge accounting, and thus requires a higher level of capital reserves for possible losses.


Insurers were granted a three-year grace period on this rule, in step with IFRS17 -- a separate set of rules that defines insurance contract liabilities so as to reflect future cash flows and risks -- which will take effect in January 2021.

But those whose financial statements are combined with that of their financial holding company will also have to draw up a separate account book based on IFRS9 in order to align themselves with their parent unit, officials said.

The list includes Hanwha Life Insurance, NH NongHyup Life Insurance, Shinhan Life Insurance, Hana Life Insurance, KB Life Insurance, KB Insurance, NH NongHyup Insurance and Meritz Fire & Marine Insurance.

“We are currently working on developing a two-track accounting system which will work out one financial statement according to current standards for industry comparison and another (based on IFRS9) for public disclosure,” said an official of Shinhan Life Insurance, an affiliate of Shinhan Financial Group.

Meanwhile, a recent simulation conducted by Korea Investors Service showed that eight out of 15 major local insurers as of the end of 2020 are likely to fall below the IFRS17-suggested guideline for risk-based capital, which is 150 percent.

In the case of market leader Samsung Life Insurance, its RBC was estimated to drop from 300 percent as of the end of last year to 270 percent as of the end of 2020.

Should the RBC -- a core indicator for financial soundness -- fall below the 100 percent mark, financial regulators may intervene and order corrective actions.

“The risk (of low RBC level) was especially high in large life insurance companies, which are highly sensitive to interest rate changes and heavily reliant on specified accounts,” said an official of the KIS.

By Bae Hyun-jung (