FSS Launches Actuarial Audit Team to Target "Rubber-Band Accounting"... "Regular Audits in the First Half"

Controversy Grows Over "Rubber-Band Accounting" Due to Optimistic Actuarial Assumptions by Insurers
Regular Audits to Begin in First Half; Actuarial Assumption Report System to Be Introduced in Q2

The financial supervisory authorities are set to strengthen their inspection system regarding the actuarial assumptions used by insurance companies in calculating future profits and losses. If any illegal activities are detected, such as insurance companies intentionally distorting actuarial assumptions to inflate profits, the authorities will tighten oversight and impose sanctions. This measure is intended to prevent so-called "stretch accounting" practices, such as excessively low lapse rate assumptions, which artificially boost profitability indicators in the ledgers.

On March 2, the Financial Supervisory Service announced the "2026 Actuarial Supervision Work Plan," which includes these measures, stating, "We plan to launch a regular audit in the first half of the year to intensively examine how insurance companies apply actuarial assumptions." The newly established actuarial supervision team will be responsible for overseeing all aspects of insurance companies’ actuarial assumption practices. In particular, the team will focus on whether insurers are properly complying with prudential standards under the Insurance Business Act, supervisory accounting standards, and other relevant regulations when evaluating insurance liabilities.

Actuarial assumptions are numerical standards that reflect how insurers forecast future circumstances, including mortality rates, loss ratios, lapse rates, and interest rates. Since the implementation of the new International Financial Reporting Standard (IFRS 17), the importance of actuarial assumptions in the process of evaluating insurance liabilities has increased. However, since the adoption of IFRS 17, there has been continued controversy over "stretch accounting," with some insurers allegedly making favorable assumptions regarding future loss ratios and lapse rates in order to boost their insurance contract service margin (CSM), a key profitability indicator.

If an insurance company assumes that the amount of insurance benefits to be paid out to customers in the future will be smaller, the CSM increases, making it appear as though the company's performance on the books has improved. Since insurance contracts are generally maintained over several decades, any change in actuarial assumptions can significantly alter an insurer’s profitability and soundness indicators. According to the Financial Supervisory Service, even lowering the loss ratio assumption by just 1 percentage point can increase insurance profits by around 5%.

There have also been criticisms that some insurers have applied excessively optimistic actuarial assumptions to inflate short-term results. In 2024, some insurers reportedly used optimistic lapse rate assumptions for single-premium whole life insurance products to increase profitability, then sold these products competitively, raising concerns about potential consumer harm.

The Financial Supervisory Service plans to focus on reviewing: ▲the rationality and consistency of the process by which insurers calculate actuarial assumptions ▲whether the cash flow model is consistent with policy terms and calculation statements ▲the appropriateness of the actuarial assumption system ▲and whether internal control systems are operating effectively.

If the review uncovers significant violations of the Insurance Business Act, the Act on Corporate Governance, or other laws, the authorities plan to impose strict sanctions on the relevant institutions and their executives and employees. Until now, actuarial assumptions have been considered estimates based on future projections, and the IFRS 17 regime has been operated on a principles-based approach allowing insurers autonomy in accounting, so regulatory responses have mostly stopped at recommendations for improvement. However, going forward, if illegal practices are found, they are expected to result in substantial sanctions.

The Financial Supervisory Service plans to launch a regular audit in the first half of the year. Additionally, it will dualize the audit approach into regular and ad hoc audits, and differentiate audit cycles based on factors such as insurer asset size to enhance inspection efficiency. Furthermore, in the second quarter, the Financial Supervisory Service plans to introduce the "Actuarial Assumption Report" system to systematically verify the appropriateness of actuarial assumptions.

An official from the Financial Supervisory Service stated, "We will continue to work to establish rational and reliable practices for evaluating insurance liabilities by disseminating exemplary cases in actuarial supervision work."

This content was produced with the assistance of AI translation services.