Additional Capital Needed
It has been found that the 25 life insurance companies that are currently doing business in South Korea need to increase their capital by approximately 50 trillion won within three years under the new International Financial Reporting Standards (IFRS) and Solvency II Directive.
Specifically, the amount is as large as 43.4 trillion won for the top five, that is, Samsung, Hanwha, Kyobo, NH Nonghyup and ING. In addition, the top three with higher ratios of high-interest products need to increase their capital by an amount equivalent to 10% of their total assets.
Earlier, the Korea Insurance Research Institute said that the domestic life insurance industry will be short of about 50 trillion won in capital and the risk-based capital (RBC) of the firms in the industry will show an average decline of 150% or so if Phase 2 of IFRS 4 is implemented in the current state.
Phase 2 of IFRS 4 is scheduled to become effective in 2020 in most developed economies. According to it, the companies’ debts are to be evaluated based on not the original values but the market values while their policy reserves are to be put on their ledgers as liabilities through yearly value reassessments, which results in an amount of extra capital requirements. Besides, savings insurance products are excluded from their insurance incomes under the new standards, which implies a decline in their incomes.
Those companies sold a large number of insurance policies at fixed high interest rates with interest rates in the country skyrocketed in the wake of the financial crisis in 1997. Now, however, the base rate is about 1% in South Korea and those products are posing a significant burden on their insurance money payment while the new accounting standards are expected to add fuel to the fire.
Meanwhile, foreign or smaller insurance companies and those that did not jump on the bandwagon in the late 1990s have been found to be exposed to less or little additional capital requirements.