In the ramp-up to 1 January 2022 with the implementation of the International Financial Accounting Standards 17 (“IFRS17”) as published by the International Accounting Standards Board (“IASB”) which replaces the earlier IFRS 4 accounting standards in conjunction with the roll-out of the Korean-Insurance Capital Standards (“K-ICS”) as announced by the Financial Supervisory Service of Korea (“FSS”), the insurance industry has faced many challenges including massive updates to their internal information technology to comply with both IFRS17 and K-ICS, modifications to actuarial methodologies, and changes to financial accounting. In this back-drop, it was alleged that most insurers in Korea faced a significant decrease in their Risk-Based Capital Ratio (“RBC Ratio”) with some insurers falling below the statutory minimum. The severity of the K-ICS accounting of liabilities led to K-ICS 2.0 (see below) which has alleviated some of the financial burdens to the insurers as they prepare for 2022. Pursuant to the Insurance Business Act and its subordinate regulations, the statutory RBC Ratio is set at a minimum of 100% while the recommended guideline by the FSS is 150% with a dire need of capital injection or other form of capital relief.

FSC Announcement on FinRe

On 25 November 2019, the Financial Services Commission (“FSC”) closed the Task Force at the FSS which was examining potential solutions for insurers facing capital challenges under the implementation of IFRS17 and K-ICS.

The insurance industry along with the FSC and FSS have had on-going discussions throughout 2019 on solutions and regulatory changes to alleviate the financial burdens to insurers and reinsurers under IFRS17 and K-ICS. The FSS formed a Task Force of regulatory officials and industry participants to examine a number of solutions such as the permissibility of co-insurance as a form of financial reinsurance as a possible solution for the dire need for capital relief of various insurers in the Korean marketplace including Insurance Linked Securities. It was noted by an official at the FSS that revisions to the Insurance Business Act are needed for the management of reinsurance.

Regulatory officials stated that co-insurance may be permitted in early 2020. In the event that co-insurance is given a “green light” – insurers experiencing reverse margins in interest rates can help alleviate the challenges in the re-calculations of revenue and debt with the transfer of interest rate risks under insurance contracts to reinsurers including other financial risks such as premium risk, lapse risk, etc. The FSS is now reviewing the necessary changes to be made to the Insurance Business Act and any relevant regulations to permit co-insurance. It is expected that the FSS will make a final announcement on the legislative amendments to the Insurance Business Act in the first quarter of 2020.

Overview of IFRS17

IFRS17 will introduce an all-across-the-board, consistent, principle-based set of accounting rules for the treatment of insurance contracts where insurance liabilities are measured at a present value as a standard uniform measurement under a presentation approach. Insurers and reinsurers and their respective insurance and reinsurance contracts as issued and held will be subject to IFRS17 along with certain investment contracts on a discretionary participation basis. There are a number of accounting concepts which are introduced under IFRS17 such as:

  • Aggregation of Like-Risks. In calculating the liabilities for purposes of IFRS17, the aggregation of risks that are similar while managed under a certain portfolio, such liabilities shall be calculated in determining the proper capitalization and reserving and shall also be sub-categorized into those that are (i) onerous at inception, (ii) does not present any onerous characteristics in the future, and (iii) a remaining catch-all sub-category for all other types of contracts.
  • Premium Allocation Approach. IFRS 17 sees insurance contracts as four allocated segments of (1) future cash flow, (2) time value of money, (3) a risk adjustment measure of non-financial risk, and (4) a contractual service margin that represents any profit expected from fulfilling the contract. Under IFRS17, the foregoing segments of a contract shall be calculated on an item-by-item basis and then accounting for same at different times over the contract period. However, the Premium Allocation Approach will then take the foregoing methodologies and elements to allow the insurer or reinsurer to release each of them uniformly at a single rate.
  • Presentation of Profits and Losses. Presentation under IFRS17 will require insurers and reinsurers to recognize financial performance as (i) the revenue of the insurer or reinsurer, (ii) service expenses and (iii) finance income or expenses. However, reinsurance income and expenses under reinsurance contracts held shall remain separate from insurance income and expenses issued by insurers and reinsurers. In this regard, insurers and reinsurers shall present profits and losses along with service expenses on a contract group basis as issued by the insurers and reinsurers.

Overview of K-ICS

K-ICS is the local statutory insurance accounting standards which was announced by the FSC in July 2018 and more commonly known as K-ICS 1.0 based on the Solvency II regime of the European Union and International Capital Standards as promulgated by the International Association of Insurance Supervisors. It was later amended in September 2019 to provide for a less stringent evaluation methodology of the liability of insurers. The current version of K-ICS 2.0 will reinforce the risk management levels of insurers while also improving capital soundness for both local and foreign insurers licensed in Korea. The following are some of the main concepts under K-ICS 2.0.

  • Payment of Liabilities. Under the new accounting rules under K-ICS 2.0, payment liabilities of insurers will be calculated based on the on the market value of such liabilities and not book value entries as in the past. In turn, such calculations may result greater liability amounts for insurers, which could result to an increase in liabilities on the financial books of insurers.
  • Evaluation of Assets and Liabilities. Similar to IFRS17, K-ICS will more comprehensively and timely evaluate the liabilities of an insurer which include debt securities, loan receivables, real estate , insurance and other financial liabilities on market value basis moving away from the current cost assessment basis of certain assets and debts.
  • Required Capital. The required capital for an insurer under K-ICS 2.0 is measured by the insurance risks (e.g., general insurance risks, morbidity/mortality risks, long-term risks, etc.) with respect to insurance contracts issued and the assets managed by an insurer with respect to forward-looking fiscal year. In this regard, the risks are also calculated with various “stress” scenarios and factors with a Confidence Level of 99.5%. In the event that the ratio of available capital and the required capital is equal to or greater than 100%, then the insurer is deemed to have met the financial soundness standard under K-ICS 2.0.


Concurrent Implementation

In September 2019, the local and foreign insurers in Korea have made requests to IASB to postpone the implementation of IFRS17 until 2023. They have also made request to the FSC and the FSS for staggered implantation of IFRS17 and K-ICS in lieu of the concurrent implementation on 1 January 2022. The Korean financial regulators have acknowledged the request for hardships made by the insurers while also noting that they are well aware of a similar request made by European insurers to the IASB and their respective financial regulators.

Currently, the FSC and FSS have not made any announcement other than that they are well-aware of the challenges in implementing both IFRS17 and K-ICS on the scheduled implementation date (i.e., 2022). While on-going discussions continue, the FSC and the FSS will follow the implantation date for IFRS17 as set by the IASB while also continuing its implantation of K-ICS as scheduled.

Modifications to Liability Adequacy Test

The FSC and FSS are preparing to help insurers to expand and increase capital for IFRS17 and K-ICS to ensure proper reserving and financial soundness. In particular, changes have been made to the Liability Adequacy Test (“LAT”) to reduce the amount of liability reserves with a “Financial Soundness Reserve” which shall be maintained by the insurer while excluding amounts earmarked for profits for distribution to shareholders. Given that the LAT will increase the financial burden on insurers by requiring compliance with strengthened standards for liability reserves in stages on an annual basis until the introduction of the IFRS 17 in 2022, the FSC has decided to postpone the implementation of each stage of the LAT by one (1) year; and instead, will require insurers to accumulate a “Financial Soundness Reserve” as capital reserves and not as distributable profits of such insurers during the postponement period. As a result, insurers will have temporary relief from the financial burden under the LAT.

Intra-Company Conflicts of interests

Insurers have raised the issue that there are potential and inherent conflicts of interests with the implantation of IFRS17 with roles being blurred between the Finance Department and Risk Management Department of an insurer. It is expected that there will be overlapping roles between the two departments of an insurer in terms of their respective roles for insurer accounting purposes. For example, the risk management functions of a Corporate Risk Officer of the Risk Management Team may be undermined or in conflict with those of a CFO of a Finance Department of the insurer – especially in light of the rank and hierarchy between the two officers within the insurer organization. Therefore, in terms of management of the insurer, the two departments may not be in-line with one another when it comes to the application of IFRS17 from a corporate risk perspective and the financial perspective of the two executives.

Divestiture of Real Estate Investments

Currently and in response to divestitures and re-diversification of assets by insurers, a legislative bill is on the floor of the National Assembly which seeks to amend the Insurance Business Act to fix the total amount of foreign real estate assets and foreign currency to be held in the general account and the special account of an insurer at fifty percent (50%). Currently, such assets are capped at thirty percent (30%) of the total assets in the general account and twenty percent (20%) of the total assets in the special account.

Adjustments to Interest Rates

Over the course of 2019, insurers and reinsurers also reduced the interest rate of return on their securities as a way to increase capital. It was reported that bonds issued by KDB Life and Korean Re were significantly reduced when issuing bonds to raise additional capital. Finance Departments of other insurers and reinsurers may also follow in the same manner to also raise needed capital for additional reserves and operating costs.

Dividends to Shareholders and Policyholders

In the face of IFRS17 and K-ICS, it is expected that insurers will seek to retain capital and refraining from and/or delaying payments on shareholder dividends and policyholder dividends. In addition, insurers will also tighten their claims handling and claims payments to retain as much as possible as well as to reduce liabilities.

Credit Downgrades

As insurers face serious financial challenges with IFRS17 and K-ICS, ratings agencies are carefully monitoring the financial health of all insurers in Korea. In response, for those insurers that are unable to quickly mobilize and find the necessary capital relief to continue healthy insurance business operations under the new accounting regimes, there may be downgrades in the credit ratings of various insurers as they take significant hits to their RBC Ratios as required under regulatory framework in Korea.


At the outset of 2020, it is expected that insurers will continue to search for capital relief solutions including the restructuring of liabilities. In addition, various insurers that are impacted by the implementation of IFRS17 and K-ICS in 2022 may pursue acquisition or transfers of blocks of business. Some insurers will also look to traditional reinsurance to also alleviate the pressures on their financial accounting.

Also, various market participants will be paying close attention to on-going review and the amendments to the Insurance Business Act for co-insurance as a way to cede financial risks to a reinsurer to unload certain liabilities and making more capital available.

We hope that this article has been helpful but please direct any inquiries and/or comments you may have to John JungKyum KIM, JinHong KWON, YeonHo CHANG and/or SaeEum KIM of the Insurance & Reinsurance Practice Group.

If you have any questions regarding this article, please contact below:

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Yeonho CHANG (

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