South Korean insurance companies should hurry up with capital expansion as a new global insurance standard, International Financial Reporting Standards (IFRS) 17, will take effect in 2021.

At a board of directors meeting in London on November 16 (local time), the International Accounting Standards Board (IASB), the global accounting rule maker, decided to implement IFRS 17 as a new accounting standard for insurance companies that will replace IFRS 4 Phase II effective on January 1, 2021. The board will announce the detailed guidelines next year.

Following the decision, insurance companies across the world, including those in Korea, should report their financial statements for the January-March quarter in 2021 based on the new IFRS 17 standard that requires insurers to report their debt based on market value, not book value.

In general, insurers invest insurance premiums policyholders pay and later pay back the policyholders benefits based on the yield rate promised on policy contracts. In accounting books, the money insurers have to return to their policyholders is recorded as debts.

So far, insurance companies have estimated liabilities based on book value, applying market interest rates at the time of contract signing. Such an accounting standard has allowed an insurance company to set aside the same amount of reserve for the future payout every year until a contract expires.

But upon the adoption of the new insurance rule IFRS 17, insurers must assess debts or payouts that they have to provide to policyholders based on market value. This means insurers would face a hefty burden to bolster their capital in a low interest rate environment that shaves the return from their investment and lifts their debt balance for high-return, fixed-rate policies they sold for the past several years.

At the end of last month, the Korean financial authorities estimated that combined debt of the nation`s 33 insurers would rise to 96 trillion won ($81.6 billion) once the new accounting rule takes effect.

The one relief is that the IASB allowed the contract service margin, considered as future profit, to be booked as capital instead of a debt, a move that could ease burden on capital expansion somewhat.

By Park Joon-hyung

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