Fluctuating Insurance Company Performance... "Independent Committee Needed for IFRS17"

Limitations of Authorities' Guidelines
Consistent and Systematic Management Needed by Independent Organization

With the introduction of the new accounting standard IFRS17, which enhances autonomy starting this year, suspicions have been raised that insurance companies are inflating their performance. Although financial authorities have presented guidelines for insurance companies to follow when autonomously setting actuarial (accounting) assumptions, there are criticisms that this alone is insufficient. Since verification mainly relies on internal and external company checks, there are suggestions that an independent committee is needed to oversee this.

On the 18th, No Geon-yeop, a research fellow at the Korea Insurance Research Institute, emphasized this in a report titled "IFRS17 and Self-Regulation."

IFRS17, introduced this year, requires insurance companies to evaluate insurance liabilities and calculate performance based on standards they set themselves. Future expected insurance profits are initially recognized as liabilities and then amortized as profits over the duration of the contract. This has led to criticism that insurance companies have assumed favorable conditions for the loss ratio of indemnity health insurance or the lapse rates of no-surrender and low-surrender insurance to make profits appear higher immediately.

In response, the Financial Services Commission and the Financial Supervisory Service issued basic guidelines on the 1st to prevent insurance companies from arbitrarily evaluating liabilities and calculating profits. Specifically, they presented guidelines on ▲ trends in indemnity health insurance claims (cash outflows) ▲ adjustments to renewal premiums for indemnity health insurance (cash inflows) ▲ assumptions on lapse rates for no-surrender and low-surrender insurance ▲ lapse rates for high-interest products ▲ "Contractual Service Margin (CSM) amortization standards for insurance profit recognition" ▲ "Risk Adjustment (RA) amortization standards for insurance profit recognition," among others.

Nevertheless, Research Fellow No viewed these guidelines as limited. He stated, "Measures such as preparing accounting policy documents and actuarial method documents for insurance liability evaluation and strengthening external verification by actuarial firms are not common industry standards but rather rely on company autonomy and internal and external verification." He criticized that "to secure the reliability of external stakeholders such as policyholders and investors, a committee considering independence, expertise, and transparency must be formed." He explained that actuarial practice standards should be established, reviewed, and resolved through an independent body, and expertise in actuarial work should be enhanced.

Independent committees have already been operating overseas even before the introduction of IFRS17. In the UK, the Financial Reporting Council (FRC) manages the overall actuarial assumption system by forming the Actuarial Standards Board, establishing actuarial standards, holding actuarial supervisor forums, and supervising actuarial professional bodies. In Canada, the Actuarial Profession Oversight Board (APOB) establishes actuarial practice standards and manages actuaries, allowing supervisory authorities to request changes or additional guidelines to actuarial practices when necessary.

Research Fellow No said, "Although self-regulation is currently carried out through organizations such as the Korean Actuarial Society and the Senior Actuaries Council for Life and Non-Life Insurance, an independent committee is necessary for systematic and consistent management." He emphasized, "The new market-value-based insurance accounting system can amplify the volatility of capital and profits in the insurance industry, so continuous monitoring and system improvements are needed for stable establishment of the system and enhancement of market discipline functions."

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