IBK Pension Insurance, a non-life insurer that only sells pension insurance, is seeing a decline in the performance of its core insurance operations due to the introduction of a new accounting standard (IFRS 17). As it also faces the task of improving its soundness indicators, the burden on its parent company, IBK Industrial Bank, is increasing.
According to the insurance industry on the 27th, IBK Pension Insurance's net profit for the first quarter of this year was 5.2 billion won, a 47.5% decrease from 9.9 billion won in the same period last year.
IBK Pension Insurance recorded a net profit of 61.5 billion won in 2021, but this nearly halved to 36.9 billion won the following year. In 2023, the year IFRS 17 was introduced, it reported a loss of 26 billion won. Last year, it rebounded to 28.9 billion won, but in the first quarter of this year, it shifted back to a declining trend.
The reason IBK Pension Insurance incurred a loss in 2023 is due to the introduction of IFRS 17. Pension insurance adversely affects the Contractual Service Margin (CSM), an indicator of future revenue. While all insurers concentrated on selling insurance that is favorable for CSM, IBK Pension Insurance, being a non-life insurer, was unable to compete.
The most noticeable change is the reduction in the profit and loss from its core insurance operations. In 2022, IBK Pension Insurance's insurance profit and loss was 828.6 billion won, but with the introduction of IFRS 17, it plummeted to 23.5 billion won in 2023 and has remained at a similar level since. The reserves for liabilities that insurers set aside for insurance claims have traditionally been evaluated as simple liabilities; however, the evaluation method has changed under IFRS 17 to recognize them as contractual liabilities.
In fact, the insurance profit and loss of IBK Pension Insurance in 2022 (828.6 billion won) was reassessed under IFRS 17 to -209.1 billion won. While insurance revenue remained unchanged at 2.26 trillion won, expenses increased from 1.4318 trillion won to 2.3702 trillion won.
As IBK Pension Insurance has to rely solely on savings insurance such as pension insurance, its dependency on investment profit and loss is inevitably increasing. The reason net profit rebounded from -26 billion won in 2023 to 28.9 billion won the following year is that investment profit and loss improved from -58.7 billion won to 13.1 billion won during the same period. Meanwhile, insurance profit and loss increased only by about 10 million won.
As the dependency on investment profit and loss increases, the risks associated with interest rate fluctuations are bound to expand. Changes in interest rates can significantly alter the valuation of the assets and liabilities held by IBK Pension Insurance. This is why financial authorities recently demanded the refinement of Asset-Liability Management (ALM) in response to interest rate fluctuations.
Issues of soundness are also burdening IBK Pension Insurance. While it was regarded as a stable insurer in terms of the Key Indices of Capital Solvency (KICS), these indicators have declined following the introduction of IFRS 17. As of the end of last year, the KICS, after applying transitional measures, stood at 234.3%, which is good; however, prior to applying the transitional measures, it was slightly above the statutory threshold of 111.5% (100%). Transitional measures are designed to gradually apply new risk amount assessments, considering that the KICS implementation will lower the solvency ratio of insurers.
Particularly, as a plan is set to be introduced in which timely corrective actions will be taken if the KICS, which is based solely on core capital with strong loss-absorbing capacity, fails to exceed the threshold, the burden on IBK Pension Insurance is increasing. The bank's core capital KICS is estimated to be 21.6% at the end of last year, significantly below the expected threshold of 50%.
To secure core capital, it must either improve operating profit or implement a capital increase. With low expectations for operating profit improvement, IBK Pension Insurance has little choice but to pursue a capital increase. Consequently, the burden on its parent company, IBK Industrial Bank, is increasing. Earlier, IBK Industrial Bank implemented two rounds of capital increases totaling 300 billion won in 2020 and 2023. As a result, IBK Pension Insurance's core capital increased from -19.3 billion won at the end of 2023 to 146.6 billion won at the end of last year.