Korean insurers set for higher profits under new accounting rule

Investors from abroad are also starting to take notice, purchasing a net KR₩31.6 billion ($24 million) in Hyundai Marine this year. Topping the rest of the investors’ buying list are Samsung Life Insurance at KR₩142.1 billion, Samsung Fire at KR₩82.5 billion, and DB Insurance at KR₩21.8 billion.

Liability based on market value

The new accounting standard will take insurance liability with evaluations based on market value as opposed to cost, which was what the previous standard implemented. Large insurers in the country are now able to introduce contractual service margin, under which profit generated from insurance profits can be reflected as profit. According to the report, with the implementation of this standard, if a profit of KR₩1 million can be generated from cancer insurance over a 10-year period, then that profit can be recognized as KR₩100,000 per year.

While insurers may experience fluctuations in performance with savings-type products due to market value evaluation, the resulting margin can be a positive factor in increasing net profits. Property and casualty (P&C) insurers may also benefit more from these changes as they offer more guaranteed product than those sold by life insurers.

Shinhan Investment analyst Lim Hee-yeon said that evaluation of the corporate value of insurers combines margin and capital as the intrinsic value (EV) concept as opposed to the price-to-book ratio. When this new IFRS17 standard is applied to the after-tax insurance operating profit of five companies calculated last year, it was found that they generated KR₩4.6 trillion, a figure which represented 99% of the net profit generated under the previous standard.

Lim further explained that taking into consideration that investment operating profit should be included, the profit increase due to the system change is likely to be even greater. Shinhan Investment predicts an average growth between seven and ten percent annually over the next five years for insurers’ operating income.

The new accounting standard is also expected to bring benefits to investors, particularly in predicting dividend trends in stock investments. Compared to IFRS4 which took into account insurance premiums at the beginning of the contract and insurance claims in the later part, IFRS17 takes an incurred-based approach and profits generated through uniform allocation of contractual service margin are evenly spread, making it easier to predict future earnings.

Contractual service margin growth is noted to be a critical factor in selecting companies that are expected to have profit growth. Taking this into account, Hyundai Marine leads the pack post-tax insurance operating profit for the next five years at 10%, followed by DB Insurance at 7.5 %, and Samsung Fire at 7.4%. For the life insurance sector, Samsung Life sits atop at 9.8%, followed by Hanwha Life at 9.3%.

The Cambodian insurance sector also recorded major growth as the IRC noted total premium of US$331.8 million in 2022, a growth of 10.6% from the US$299.8 million recorded in 2021.

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