[Column] IFRS17 'Performance Confusion'... Insurance Companies Remain Unchanged

Since the introduction of the new accounting standard IFRS17, the insurance industry has been stirred as insurers announced their first earnings. Despite no significant changes in the business environment, some large and medium-sized insurers showed excessively large improvements or declines in their performance.

Samsung Life Insurance, the industry leader with assets totaling 300 trillion won, reported a consolidated net profit of 739.1 billion won in the first quarter of this year. This represents a 145.7% increase compared to the same period last year. Kyobo Life Insurance, a large life insurer, also saw its net profit surge by 59.4% to 514.2 billion won compared to the first quarter of last year. NH Nonghyup Life Insurance, a small to medium-sized life insurer, increased its net profit from 43 billion won to approximately 114.6 billion won during the same period, about 2.7 times higher. On the other hand, Hanwha Life Insurance, considered part of the big three along with Samsung and Kyobo, recorded a net profit of 422.5 billion won, down 11.8% over the same period. Considering that life insurers generally operate stable businesses focused on long-term insurance, such large fluctuations in performance are unusual.

The dramatic changes in net profit are due to IFRS17. Under the new accounting standard, insurers are granted autonomy when estimating future profits from insurance contracts. For example, in the case of the Contractual Service Margin (CSM), which evaluates future profits from insurance contracts, the margin is initially recognized as a liability at the contract inception and amortized as profit over the contract period. Insurers can choose the rate at which they recognize this margin. A representative from a large insurer explained, "Our company's fundamentals have not changed," adding, "The accounting standards have changed, causing the newly calculated figures to fluctuate sharply."

When standards change, trial and error naturally follow. Over time, the system will stabilize. The problem is that this period should not be too prolonged. Major large insurers are listed on the stock market and are valued accordingly. The longer the illusion period lasts, the harder it is for investors to accurately assess the value of insurers. It also becomes difficult to compare with other insurers or even with the same insurer's past performance. Even securities analysts express difficulties.

There is also concern that insurers might 'exploit' this autonomy. Competition could intensify to sell only products favorable to CSM. This could reduce consumers' choices of products. There are already suspicions that insurers have inflated earnings by adjusting assumptions such as surrender rates for no-surrender insurance and loss ratios for indemnity health insurance to suit their preferences.

The Financial Supervisory Service has announced plans to promptly establish detailed standards for accounting assumptions to prevent such damages. This has drawn criticism that it interferes with the autonomy and market competition, which are the main principles of IFRS17. However, normalizing abnormalities is not market interference; it is the supervisory authority's rightful duty. Rather, standards must be established quickly and accurately to prevent further confusion. Market competition based solely on autonomy is not the solution. What matters is fair competition. Bernard Mandeville's "Fable of the Bees," which suggests that the selfishness and desires of bees drive societal progress, should not overlook that bees are assumed to work "desirably" hard within the pursuit of their selfishness and desires.

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