Restructuring of Insurance Industry
After KDB Life, Hyundai Life will start its restructuring. This is the second restructuring of life insurers since the start of this year. The two life insurers started restructurings prior to the introduction of the International Financial Reporting Standard (IFRS 17) which will come into effect starting in 2021. Some analysts say that Korean life insurers’ restructurings started in earnest, starting with these small to mid-sized life insurers.
According to the insurance industry on September 6, Hyundai Life was receiving applications for voluntary retirement from all of its employees which number about 450 for a business restructuring.
Hyundai Life's restructuring is blamed on the fact that its RBC ratio slid and its deficit is expanding despite a capital increase by Fubon Life Insurance in Taiwan of last year. As of June this year, Hyundai Life's RBC ratio sat at 164%, barely exceeding financial authorities' recommendation of 150%. In the first half of this year, Hyundai Life suffered continuing loss by posting nine billion won (US$8.0 million) in loss.
Prior to this, KDB Life announced 200 voluntary retirements in June. One of the reasons that small and mid-sized life insurers are undergoing restructurings is for the IFRS 17 which will be introduced in 2021.
At the moment, it is necessary to accumulate risk-based capital (RBC) and take a liability adequacy test (LAT) on a cost basis. When the IFRS 17 is introduced, life insurers should accumulate liability reserves based on market value in accordance with the new accounting standards in the future. Accordingly, companies with high interest-rate contracts sold in the past need to accumulate a substantial amount of debt, which means that small- and mid-sized life insurers have to preemptively begin restructuring themselves.
"Insurers, which have sold a large number of high-interest savings-type insurance policies in the past, have no choice but to make a capital increase or carry out restructurings in order to expand their capital," said an insurer in the insurance industry. “In addition to KDB Life or Hyundai Life, more insurers may start to restructure themselves."