Co-reinsurance in the insurance sector is expected to be introduced in April this year. Risks related to interest rate fluctuations are expected to be shared with reinsurance companies and insurance companies’ reverse margin and recapitalization burdens are expected to be alleviated.
The Financial Services Commission held a meeting on Jan. 30 and discussed the issue as the first step for insurer restructuring. According to its plan, insurance companies will pay savings insurance premiums and additional insurance premiums to reinsurance companies such as Korean Reinsurance Co. and transfer interest rate risks as well as insurance risks to them at the same time.
Accounting procedures will be further clarified, too. Specifically, an insurance company will regard the difference as prepaid expenses or assets and write it off during a contract period and a reinsurance company will regard the difference as an unearned income or liabilities and write it off during the contract period.
South Korean insurers sought recapitalization methods, such as subordinated debt issuance and investment in long-term treasury bonds, with IFRS 17 and the Korean Insurance Capital Standard (K-ICS) scheduled to be implemented in 2022. They have reached a conclusion that those methods have their own limitations and demanded a measure to reduce an increase in liabilities with regard to high-interest insurance contracts.
According to the commission, co-reinsurance is expected to contribute to the financial soundness of insurers and foreign reinsurance companies’ know-how is expected to be shared in that it has already been utilized in the United States and Europe. “Reinsurance companies need to be capable of bear every risk, including interest rate risks as well as insurance risks,” the commission explained, adding, “As such, foreign rather than domestic reinsurers are likely to be utilized first.”