Financial Supervisory Service to Implement New Solvency System Next Year... Introduction of Shock Scenario Method

[Asia Economy Reporter Song Hwajeong] Starting next year, the new international accounting standard (IFRS17), which evaluates insurance liabilities at present value, will be implemented, and in line with this, the new Solvency II system (K-ICS) will be enforced. The new Solvency II system sets the recognition limit for supplementary capital at 50% of the solvency standard amount and introduces a shock scenario method that measures risk based on the level of impact during a crisis.

On the 5th, the Financial Supervisory Service (FSS) announced that the new Solvency II system will be implemented in line with the IFRS17 enforcement schedule.

The new Solvency II system established a prudential supervision standard balance sheet, distinguishing it from general accounting (GAAP) and supervisory accounting (SAP). It set principles for classifying net assets (assets minus liabilities) on the prudential supervision standard balance sheet into basic and supplementary capital based on loss absorption capacity, and set the recognition limit for supplementary capital, which has some restrictions on loss coverage, at 50% of the solvency standard amount.

Additionally, to enhance international consistency, new measurement risks such as longevity, lapses, business expenses, catastrophes, and asset concentration risk were added. To measure risk more precisely, the 'shock scenario method' was introduced, which measures risk as the amount by which net assets decrease when shocks are applied to future cash flows.

The FSS conducted on-site inspections from October 4 to 27 to support insurance companies' preparations ahead of the new system's implementation.

The on-site inspection results showed that most insurance companies have been steadily preparing in terms of financial statement preparation and systems for calculating the K-ICS ratio. However, many companies are still in the process of establishing internal control processes such as verification procedures to ensure the accuracy of calculation results.

Moreover, some insurance companies tended to underestimate insurance liabilities by setting actuarial assumptions such as loss ratios optimistically without considering experience statistics when evaluating insurance liabilities. In response, the FSS disseminated the findings from this on-site inspection to the industry to help insurance companies set actuarial assumptions that significantly impact insurance liabilities more reasonably.

The FSS plans to continuously promote legislative amendments, including actively supporting the passage of amendments to the Insurance Business Act for IFRS17 enforcement in the National Assembly, to ensure the smooth introduction of the new system in January next year. It also plans to maintain continuous communication with insurance companies by establishing hotlines and holding explanatory sessions to minimize trial and error during system operation.

An FSS official stated, "We will actively support insurance companies to smoothly implement the new system by enhancing industry personnel's understanding through in-depth training on K-ICS detailed calculation standards and distributing explanatory materials."

This content was produced with the assistance of AI translation services.