Korean Re's Business Results for the First Half of 2023
For the first six months of 2023, Korean Re reported KRW 268.9 billion in net income, with an underwriting income of KRW 215.3 billion. Although we were hit by fire losses at Hankook Tire and losses from the Turkey earthquake, there was a significant improvement in the business performance of life and long-term insurance as well as some commercial lines of business.
We generated an investment income of KRW 127.5 billion. There was an increase in evaluation gains due to a new approach to the classification of financial assets under IFRS 9. It is also worth noting that under IFRS 17, foreign currency exchange gains and losses on insurance contract liabilities are reclassified from the insurance profit and loss (P&L) to insurance finance income & expenses, which is a sub-item of the investment P&L.
Insurance revenue amounted to KRW 2,981.9 billion in the first half of 2023 compared to KRW 3,168.3 billion from a year earlier. One of the major changes in the income statement based on IFRS 17 is the recognition of revenue on an accrual basis not on a cash basis, which allows revenue to reflect the services provided and exclude deposits. Non-distinct investment components are excluded from the insurance P&L.
There are also changes in accounting for reinsurance commissions. Fixed reinsurance commissions whose amounts are determined regardless of whether or not an insured event occurs are deducted from insurance revenue, resulting in a reduced appearance of the revenue volume. Previously they were treated as a business expense for the current period under IFRS 4. Variable reinsurance commissions were also treated in the same way under IFRS 4, but they are now recognized as part of claims under IFRS 17. Both business expenses and claims are recognized in profit or loss, so there is only a classification impact with no effect on net income.
Our contractual service margin (CSM) amounted to KRW 1.02 trillion as of the end of June 2023. The CSM amount is estimated to stay around KRW 1 trillion. The CSM is a new liability that reflects future profits. As it is released into earnings as insurance contracts are fulfilled as expected, the CSM is an important indicator of insurance business results. CSM movement analysis will be one of the key aspects of understanding how well a (re)insurance company is and will be performing. CSM balance is positive by its nature and is expected to amortize into profit over time.
In 2023, Korean Re started to release its quarterly business results based on the new accounting standards, IFRS 17 and IFRS 9. Comparative figures from the previous year may not be fully comparable with the 2023 figures disclosed in accordance with both IFRS 17 and IFRS 9 because the 2022 figures for the insurance business are presented on the basis of IFRS 17 while the corresponding figures for the investment business are still based on IAS 39.
There are three options that a company can take regarding how it would transition to IFRS 17, which are the full retrospective approach, modified retrospective approach and fair value approach. We adopted the modified retrospective approach for general insurance and the fair value approach for life and long-term insurance. We also used the Premium Allocation Approach (PAA) for general insurance and the Building Block Approach (BBA) for life and long-term insurance.