The Bank of Korea’s (BoK) Friday interest rate cut and its indication that further reductions are on the way, is negative news for the country’s insurers which have been reporting results under the market based IFRS 17 accounting, framework since January last year.
The BoK made its first rate cut since 2022 on Friday when the board voted six to one in favour of a 0.25% reduction in the country’s benchmark rate to 3.25% as Korea struggles with a stuttering economy.
The reduction hits the country’s insurers in two ways. Firstly IFRS 17, which unlike the previous accounting standard in place in Korea, calculates liabilities at market not book value. This means when the interest rate declines, the discount rate used for these liabilities decreases, resulting in rising liabilities.
Lower interest rates also potentially mean lower returns from insurers bond holdings. The combination of lower returns and higher liabilities under a lower interest rate environment could feed through into carrier’s profits.
Despite the potential negative impact of the recent rate cut, Korea insurers saw their results boosted in 2023 from the switch to IFRS 17. Earlier in 2024, Korean Re calculated the sector reported a KRW 13.4 trillion increase in net income, (up 45%) in 2023, the first year under IFRS 17.
“This significant year-on-year increase was primarily due to the implementation of IFRS 9 and IFRS 17, which altered the accounting treatment of insurers’ earnings. Additionally, the increase was supported by stronger sales of protection-type insurance for life insurers and long-term insurance for non-life insurers,” Korean Re said.
Whatever the impact of lower interest rates is on Korean insurers profitability it appears they will have to deal with a falling interest rate environment in the near term with the central bank’s governor Rhee Chang-yong indicating that more cuts are on the horizon.
“[The rate cut could be] interpreted as a hawkish cut, as financial stability will remain an important policy consideration even as we make this reduction.
From where we stand now, (the policy interest rate) sits above our neutral interest level by any model, so there is room for further reductions,” he said at a press conference after the rate decision, according to Reuters.
