Future Increase in Actual Loss Insurance Premiums↑·No/Low Surrender Rate↓...Preventing Insurance Companies' Performance 'Illusion'

Financial Authorities Announce Guidelines for Calculating Insurance Companies' Performance
Standards Provided to Prevent Arbitrary Interpretation
Implementation Expected as Early as 2Q

Financial authorities have presented standards for the accounting assumptions that insurance companies should use when calculating their performance. This is to prevent arbitrary interpretations that could inflate results as the new accounting standards increase the scope of discretion.

On the 31st, the Financial Services Commission and the Financial Supervisory Service disclosed the 'IFRS17 Actuarial Assumptions Guideline' containing these details. The guideline sets standards for key actuarial assumptions that significantly impact financial statements under the new accounting standard IFRS17. Although IFRS17 grants autonomy to calculate insurance liabilities using proprietary experience statistics and evidence, concerns have been raised about potential misuse.

In fact, despite no significant changes in the business environment, insurance companies' first-quarter results this year fluctuated. Different assumptions were made by each insurer regarding future lapse rates for no-surrender insurance and loss ratios for indemnity health insurance, making comparisons with other companies as well as with the same company's past performance difficult.

The financial authorities first mandated the use of experience statistics from the past five years or more when calculating the rising trend of indemnity health insurance claims and renewal premiums. This is to prevent insurers from using optimistic assumptions without objective and rational grounds, estimating future profits despite ongoing losses in indemnity insurance. For example, if it is assumed that indemnity insurance premiums will increase significantly upon renewal compared to past experience statistics, a loss contract can turn into a profit contract. This can result in a substantially higher calculation of the insurance contract service margin (CSM), the new profit indicator under IFRS17.

Lapse rates for no-surrender and low-surrender insurance are also required to be set lower than those for standard insurance. No-surrender and low-surrender insurance products have little or no surrender value during premium payment and a significant increase in surrender value after payment. Policyholders are less likely to lapse early. However, since these products have only recently been introduced, experience statistics such as lapse rates are insufficient. Authorities judged that insurers exploited this by setting lapse rates higher than those for standard insurance, creating an 'optical illusion' of increased profits.

In the same context, standards for lapse rates on high-interest products were also presented. High-interest products correspond to loss contracts from the insurer's perspective. If lapse rates are calculated high, the best estimate liability (BEL) is measured lower, and the CSM can be measured higher. Therefore, authorities prohibited the integrated calculation of lapse rates without distinguishing them from low-interest products.

Concerns were also raised regarding the calculation of CSM. CSM is a concept that recognizes future profits generated by insurance contracts over time annually. Authorities plan to include investment services when amortizing CSM in the future. This is because insurers currently include only coverage services when calculating insurance contract service volumes and either do not consider investment services that mainly occur in the later stages of the contract or fail to properly reflect the frequency and recurrence of coverage risks. In such cases, the initial amortization rate may be high, leading to a significant recognition of current profits.

Additionally, when amortizing risk adjustment (RA) within insurance liabilities, the same baseline data must be used at both the beginning and end of the current period.

This guideline will be reflected as early as the second quarter results of this year. Authorities plan to provide additional guidelines if necessary through future meetings with accounting firm auditors and analyses of differences between expected and actual amounts.

A financial authority official explained, "The guideline was created to minimize unreasonable elements in actuarial assumptions, prevent confusion during the initial implementation of the new system, and secure the reliability of financial statements," adding, "Changes arising from the application of the guideline will be guided to be explained by insurers through financial statement notes and other disclosures."

On the 9th, officials were busy moving in the corridor of the Financial Services Commission at the Government Seoul Office in Jongno-gu, Seoul, where financial authorities decided to promote a plan to include mortgage loans (Judaemae) in the 'debt refinancing' infrastructure scheduled to be launched in May by the end of the year. Financial authorities explained that they aim to reduce the interest burden on mortgage loans by building a debt refinancing platform that allows users to compare financial sector loan interest rates at a glance and switch loans easily. Photo by Dongju Yoon doso7@

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