[1mm Financial Talk] Ahead of 2Q Earnings... Insurance Companies Diverge on Accounting Application

Conflicting Views on Authorities' Conservative Guideline Application
Life Insurers OK with Application from 2Q
Non-life Insurers Demand Retroactive Application from 1Q
Concerns Over Performance Gap Between 1Q and 2Q

Ahead of the Q2 earnings announcement, the gap in opinions between insurance companies and financial authorities remains unresolved. Although the authorities issued guidelines to prevent earnings inflation when applying the new accounting standard IFRS17, which allows for greater autonomy, controversy is growing over whether these guidelines should be applied retroactively. While the authorities hope that earnings will be reported according to the guidelines starting from Q2, some insurers intend to apply them retroactively to Q1 results as well, aiming to minimize the gap between Q1 and Q2.

According to industry sources on the 17th, insurance companies have differing views on how to apply the authorities' new accounting standard guidelines. Life insurers have reached a consensus to apply the 'prospective method' preferred by the authorities, whereas non-life insurers are insisting on applying the retrospective method.

Previously, the Financial Supervisory Service (FSS) prepared and provided insurers with guidelines for assumptions such as the loss ratio for indemnity medical insurance and the lapse rate for no- and low-surrender value insurance. This was to prevent insurers from overly optimistic assumptions that would inflate the Contractual Service Margin (CSM), an indicator representing future profits. In particular, while it is reasonable to use loss ratio statistics from the past 10 years or more when predicting future loss ratios, the guidelines aim to prevent the use of only the lowered loss ratios during the recent COVID-19 period as a loophole to estimate the future.

When applying these guidelines, insurers can choose between the prospective method and the retrospective method. The prospective method applies from the financial statements after the point in time indicated by the FSS guidelines, while the retrospective method reflects past financial statements as well.

Life insurers generally have no disagreements. They have agreed to apply the prospective method for now. An FSS official explained, "Life insurers have chosen the prospective method without major objections," adding, "This is understood to be because the proportion of indemnity insurance is small, so there is little impact on earnings."

On the other hand, non-life insurers, which have a large proportion of indemnity insurance, maintain their stance to apply the retrospective method. Applying the somewhat conservative guidelines from Q2 onward could widen the earnings gap with Q1. This voice is particularly strong among major non-life insurers. Since non-life insurers recorded record-breaking Q1 earnings after the introduction of IFRS17, there are concerns that applying the prospective method could result in CSM losses amounting to several hundred billion won. They worry this could be perceived as the industry being in a very poor condition with weak business performance.

An industry insider from the non-life insurance sector stated, "Choosing the prospective method preferred by the FSS could cause greater confusion in the market," and argued, "Since it is not illegal to choose and apply either the prospective or retrospective method, insurers should be allowed to freely choose."

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