[Reporter’s Notebook] Confusion Deepens in Insurance Accounting Due to 'Autonomy'

The insurance industry's accounting standards have been completely overhauled, causing widespread confusion. The source of this confusion lies in the new accounting standard IFRS17, which allows companies to set various accounting assumptions themselves to accurately reflect their actual situation.

Under the new accounting standard IFRS17, a new profitability indicator called Contractual Service Margin (CSM) has been introduced to evaluate future profits from insurance contracts. At the time of the insurance contract, it is recognized as a liability and amortized as profit over the duration of the contract. Insurance companies can 'choose' the recognition ratio themselves. The authorities believe that insurers have interpreted this aspect too favorably. While the industry estimates the net profit of life and non-life insurers for the first quarter of this year at 7 trillion won, the Financial Supervisory Service (FSS) estimates it at around 5.23 trillion won. This indicates an earnings illusion effect of about 2 trillion won due to insurers' overly 'rosy' forecasts.

As the noise grew louder, the FSS first set standards for the loss ratio of indemnity medical insurance (the ratio of paid insurance claims to premiums received) and the lapse rate of no-surrender and low-surrender insurance policies. While it is reasonable to use loss ratio statistics from the past 10 years or more when predicting future loss ratios, the aim is to prevent the use of only the lowered loss ratios during the recent COVID-19 period to estimate the future. Some argue that standards are also needed for short-term premium whole life insurance, which has recently seen overheated sales competition mainly among life insurers. There is concern that while the sales of short-term premium whole life insurance, with premium payment periods of 5 to 7 years, are rapidly increasing, the lapse rates are being applied the same as those for existing long-term whole life insurance, potentially inflating performance.

However, the authorities cannot set standards every time. If detailed standards are presented for every accounting item, it would result in a patchwork accounting standard. If insurers cling only to the minimum standards set by the authorities, the basic purpose and principle of IFRS17?to more accurately reflect the actual management situation?would be undermined. At the same time, it is not possible to leave everything to the insurers. It is difficult to prevent incentives for CEOs with fixed terms to package results as favorable within their tenure.

Ultimately, it is necessary for third-party accounting firms to have greater independence and rigorously monitor the process. This year is the first year that accounting standards for both assets and liabilities of insurers have changed. Since virtually all accounting for insurers has changed, trial and error is inevitable. However, it can only be minimized. For that, the role of accounting firms is crucial. While insurers prepare the financial statements, external audits are the responsibility of accounting firms. In a way, they can identify the substance of insurers' performance and which accounting assumptions are most appropriate even faster than the authorities. Fortunately, since February this year, the FSS has empowered this by creating a task force (TF) with actuarial firms, accounting firms, and the insurance industry to promote institutional improvements for thorough external verification. Accounting firms must not regard insurers as mere clients but must fully fulfill their role as independent overseers.

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