[1mm Financial Talk] Why Are Insurance Companies Upset... CSM Could Decrease by Hundreds of Billions

Applied from 2Q Only VS Retroactive Application from 1Q
Concerns Over Sharp Decline in Insurers' CSM Increase
Due to Large Number of Indemnity Insurance Contracts
Growing Anxiety Among Major Insurers

Insurance companies are facing increasing concerns over the accounting guidelines to be applied starting this year. This is because if the Financial Supervisory Service (FSS) applies the forward-looking method it secretly prefers, profitability indicators under the new accounting standards could plummet by several hundred billion won.

According to industry sources on the 18th, voices opposing the FSS's new accounting guideline application method are growing among non-life insurers. The FSS has convened CEOs of insurance companies and even gathered accounting firms for discussions. Although the authorities summoned representatives from each company to hear their opinions under the premise of 'no proxy participation,' no conclusion was reached, leading to discussions with accounting firms as well.

Previously, the FSS prepared guidelines for assumptions such as the loss ratio of indemnity medical insurance and the lapse rate of no-surrender or low-surrender insurance and informed insurers. This was to prevent insurers from inflating performance by making somewhat optimistic assumptions. While the FSS secretly favors applying the 'forward-looking method' from the second quarter, insurers' responses are mixed. Life insurers have agreed to follow the forward-looking method without major objections, but non-life insurers insist on using the 'retrospective method,' which applies it to all accounting for the year. They argue that if the gap in financial statements between the first and second quarters widens regardless of market conditions, comparability will significantly deteriorate.

The issue is particularly significant for indemnity medical insurance. The authorities consider it reasonable to use loss ratio statistics from over the past 10 years when predicting future loss ratios for indemnity insurance. They judge that estimating the future solely based on the lowered loss ratios during the recent COVID-19 situation is a 'loophole.' Non-life insurers are on high alert. As of the end of last year, non-life insurers held 82.8% of all indemnity insurance contracts. If the loss ratio is revised, the Contractual Service Margin (CSM), a future profitability indicator, could decrease by several hundred billion won. Some even predict that for Hyundai Marine & Fire Insurance, which holds the largest share of indemnity insurance, the CSM could decrease by nearly 1 trillion won.

In fact, Hyundai Marine & Fire Insurance held 6.16 million indemnity insurance contracts last year, accounting for a 17.3% market share. This exceeds the total number of contracts held by all life insurers combined, which was 6.14 million. Its loss ratio is also 137.5%, more than 10 percentage points higher than other 'Big 4' non-life insurers such as Samsung Fire & Marine Insurance (123.4%), DB Insurance (116.0%), and KB Insurance (110.3%). This is why the scale of CSM reduction is expected to be the largest upon guideline application.

The FSS is aware of this and plans to approach the matter cautiously before reaching a conclusion. Detailed policies are expected to be announced as early as this month. An FSS official explained, "While other profit indicators under IFRS 17 may be inflated but will inevitably return to actual conditions in a short period, making such manipulations a mere 'short-term trick,' the CSM is somewhat different. Once inflated, the CSM takes a long time to reflect actual conditions, so a more cautious approach is necessary."

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