With the implementation of the IFRS17 in 2023, insurance companies must account for their insurance liabilities on a mark to market basis, to reflect fair market value. Under the current Korean Commercial Code (the “KCC”), however, distributable profits are calculated on the basis of net assets, minus unrealized profits, which can result in a reduction in distributable profits for insurance companies. To address this issue, the Ministry of Justice has announced a proposed amendment to the Enforcement Decree of the KCC, whereby insurance companies that enter into hedging transactions to offset the risk relating to insurance transactions can offset their unrealized profits and unrealized liabilities before unrealized profits are deducted in determining distributable profits, thereby increasing the level of their distributable profits. The key details of the proposed amendment are as follows.
Introduction of New Provision to Allow Offsetting of Unrealized Profits Against Unrealized Losses (Article 19 (2) 3 of the Enforcement Decree of the KCC)
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Where an insurance company enters into the following types of hedging transactions to offset the risks relating to their insurance products, the offset of unrealized profits and unrealized losses generated from such transactions will be permitted:
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Purchase of government/corporate bonds and entering into derivative transactions to hedge risk of interest rate fluctuations on insurance policies exposure; |
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Reinsurance transactions to transfer risks related to existing insurance policies; and |
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Retirement insurance and variable insurance policies where payment under the policies vary depending on asset management performance results. |
The deadline for submission of opinions on the above proposed amendment is November 23, 2023. Thereafter, the proposed amendment becomes subject to formal review and deliberation, including by the Ministry of Government Legislation, vice-ministerial meetings and the state council. In addition to this proposed amendment to the Enforcement Decree of the KCC, more details regarding the standards for offsetting unrealized profits and losses are also expected to be announced later on.
