With the implementation of the IFRS 17 standard 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 based on net assets minus unrealized profits, which can reduce 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 (the “Proposed Amendment”). Under the Proposed Amendment, insurance companies that enter into certain transactions to hedge the risks relating to insurance transactions will be able to offset their unrealized profits and unrealized liabilities before the unrealized profits are deducted from net assets in determining distributable profits, thereby increasing the level of their distributable profits. The amendment has since been approved at the Cabinet Meeting on December 12, 2023, and became effective on December 19, 2023. 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) Item 3 of the Enforcement Decree of the KCC)
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Where an insurance company enters into the following types of transactions to hedge the risks relating to their insurance products, the offsetting of unrealized profits and unrealized losses generated from such transactions is permitted:
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Government/corporate bond purchase transactions and derivative transactions entered into to hedge the risks of interest rate fluctuations on insurance liabilities; |
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Reinsurance transactions entered into to transfer risks related to existing insurance policies; and |
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Insurance transactions where payment under retirement insurance and variable insurance policies varies depending on asset management performance results. |
The Proposed Amendment was approved at the Cabinet Meeting on December 12, 2023. As a follow-up to the foregoing, the Ministry of Justice, together with the financial authorities and the Korea Life Insurance Association and General Insurance Association of Korea, will establish guidelines on accounting treatment and profit distribution for insurance companies.
