"No Cost Reduction in Insurer's Reserve Calculation... External Verification Must Be Ensured"

Provision of Standard Verification Time... Disclosure of Actuarial Corporations Status Also

From now on, insurance companies adopting the new accounting standards must undergo more thorough external verification when calculating their reserve liabilities. Financial authorities have created a verification manual aligned with the new accounting standards and set standard verification hours to prevent blind cost-cutting.

On the 15th, the Financial Supervisory Service (FSS) announced that it held a meeting to discuss measures to enhance the effectiveness of external verification, prepared by the "Joint Task Force for Improving External Verification of Reserve Liabilities."

Reserve liabilities refer to the liabilities that insurance companies must pay to policyholders, such as future insurance claims, refunds, and policyholder dividends under insurance contracts. With the implementation of the new accounting standard IFRS17 starting this year, the method of calculating reserve liabilities has become more complex, leading to calls for more rigorous external verification by actuarial firms and others. Consequently, the authorities have introduced these improvement measures for external verification.

First, a manual was developed to verify the appropriateness of assumptions, reserve liabilities, and reserves within retained earnings in accordance with the new accounting standards. Additionally, standard verification hours, representing the minimum time required for thorough verification, were established. Accordingly, during the initial verification, companies must conduct verification for 2,400 to 4,600 hours depending on their size. This is to prevent superficial verification of reserve liabilities aimed at saving verification costs.

Until now, external verification of reserve liabilities has been criticized for its complexity and high difficulty, yet requiring less manpower and lower fees compared to accounting audits. For example, the average cost of pre-IFRS17 accounting audits was about 600 million KRW (approximately 5,000 hours), whereas the average cost for IFRS4 actuarial firm external verification was only about 50 million KRW (approximately 1,900 hours).

Indicators to assess the status of actuarial firms will also be disclosed. Since most actuarial firms are small-scale and do not disclose company information, making it difficult for insurance companies to find excellent actuarial firms, this measure reflects such concerns.

The authorities will establish 19 core indicators of verification quality, including sales, qualitative and quantitative scale of personnel, and appropriateness of verification work. Based on these, the Korea Actuarial Society will annually disclose the core indicators for each actuarial firm performing external verification on its website. Additionally, a consultative body between accounting and actuarial firms will be formed to discuss various issues and facilitate collaboration.

Cha Suhwan, Deputy Director of the FSS, stated, "If the verification of insurance companies' reserve liabilities is not properly conducted, insufficient reserves may be accumulated, leading to solvency issues." He urged, "Based on these improvement measures, we ask the insurance industry to actively cooperate so that actuarial firms can verify reserve liabilities in a more objective and effective manner."

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