[단독] Controversy over insurance company ‘reducing performance’… IFRS17 ‘major surgery’

Photo = Yonhap News The new accounting standard (IFRS17), which was introduced to the insurance industry last year, is coming to the operating table. After the implementation of IFRS 17, which evaluates insurance liabilities at market value rather than cost, the financial authorities created a practical standard (guideline) as a dispute arose about ‘performance inflated’. When the directive is applied, the performance of insurance companies is significantly reduced. It is expected that there will be major consequences, such as changes in the ratings of insurance companies or disruptions in mergers and acquisitions (M&A).

According to financial authorities and the insurance industry on the 25th, the 4th Insurance Reform Conference to announce improvements to the IFRS 17 system will be held on the 4th of next month. At today’s meeting, system development plans were related to the following disputes, including △ adoption of the non-low and low compliance insurance cancellation rate, △ adoption of the cancellation of payment​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​whole life insurance, △ acceptance of the loss rate. by age group, △ project cost overruns, and △ solution ratio (K-ICS, KIX), will be published.

The key to developing this system is to integrate the actuarial assumptions that differ from company to company. This step was taken in response to suspicions that some insurance companies were manipulating cancellation rates to favor short-term performance. At a meeting with insurance industry CEOs last August, Financial Services Commission Chairman Kim Byeong-hwan warned, “It is necessary to look back carefully to see if insurance companies have used the introduction of IFRS 17 as an opportunity to engage in violence. competition in short-term performance goods.”

Not only insurance companies, but also accounting firms and investors pay close attention. This is because this system improvement has a direct impact on the performance of an insurance company. Among large non-life insurance companies, there are some where the margin of the contract (CSM) falls up to more than 1 trillion won. It is also discussed the possibility that several companies whose Kicks ratio, which shows the strength of insurance companies, will appear lower than the recommendation of the financial authorities (150%) or the legal standard (100%) ).

Most insurance companies are strongly against it and want to negotiate. An insurance industry official said, “Each insurance company has different customers and product characteristics, so imposing uniform standards does not fit the philosophy of IFRS 17.”

“When the directive is applied, CSM drops up to 1 兆” … Insurance company ‘super emergency’

The reason that financial authorities are carrying out a major operation two years after the implementation of IFRS 17 is because suspicions have arisen that insurance companies are increasing their performance by using assumptions that are too optimistic. There is also concern that each company uses different assumptions, which reduces the reliability and comparability of financial information. When the guidelines prepared by the authorities were applied, the CSM of the insurance company decreased up to more than 1 trillion won and the bounce ratio decreased.

The insurance industry complains, saying, “The authorities’ guidelines are too conservative.” A week before the Insurance Reform Conference to be held on the 4th of next month, final coordination between authorities and the industry is going through problems.

Insurance companies with performance warning lights on

Five items on the IFRS17 agenda are being discussed at the insurance reform meeting led by the financial authorities. System development plans related to △Consideration of unlimited and low insurance cancellation rate △Consideration of cancellation rate of short payment whole life insurance △Consideration of loss rate by age group △Implementation of project costs △Start ratio, etc. .

What the industry is most concerned about is accepting the cancellation rate for non-cancellation insurance. Non-cancellation insurance is a product that does not provide a refund or a small return if the contract is canceled during the maximum payment period.

If an insurance company increases the expected churn rate, it can work aggressively by lowering premiums. It also has the effect of reducing the amount of insurance money payable in the future thereby increasing CSM. There have been many complaints in industry and academia that insurance companies concerned with short-term performance are overestimating future risks by optimistically estimating the rate of insurance cancellations. non-compliance.

The key to the guidelines established by financial authorities is to ensure that the cancellation rate at the time of payment completion is 0%. If the guidelines are implemented, a significantly lower figure will be applied than the cancellation rate currently estimated by insurance companies. As a result, both profitability indicators and stability of insurance companies are decreasing significantly. The best estimate of liabilities (BEL) is increasing rapidly and CSM is decreasing rapidly. As the available capital decreases, so does the leverage ratio.

Until now, insurance companies have been managing CSM and starting ratio as key indicators when announcing performance or establishing management plans. That’s why not only insurance companies, but also accounting companies and investors who pay close attention to the development of this system.

We are also looking at short term payment whole life insurance.

The financial authorities are in a situation where there is a problem with the cancellation rate of whole life insurance policies of short paying life insurance companies. Insurance companies are said to be overly optimistic in estimating the 10-year cancellation rate of short-term whole life insurance payouts. Early this year, life insurance companies raised the 10-year repayment rate of short term whole life insurance into the 130% range and sold it as savings insurance. Life insurance companies are also known to see a reduction in CSM of up to hundreds of billions in earnings as a result of this system improvement. However, the impact is assessed to be small compared to non-life insurance in the non-life insurance industry.

A government official explained, “Companies have been increasing their performance by using overly optimistic assumptions,” and added, “This is to normalize abnormal accounting.” “

The financial authorities have prepared three scenarios for non-compliance insurance and short-term payment whole life insurance and are receiving financial impact assessments from insurance companies. The more companies have sold the product and applied the cancellation rate more optimistically, the bigger the hit.

It is known that if the most conservative scenario is applied to non-life insurance, the BEL of non-life insurance companies A and B is expected to rise by KRW 1.4 trillion and KRW 900 billion, respectively. An increase in BEL leads to a decrease in CSM and net profit. In the case of Company C, a non-life insurance company that is trying to sell, CSM is reported to fall by up to 40%.

The insurance industry is strongly against it. This is because even if the ‘rubber band account’ is corrected, using a plan that is too conservative will have a significant impact on the business.

An industry insider said, “If the cancellation rate in the future is higher than the guidelines put forward by the authorities, who will be responsible?” Another official raised his voice, saying, “If conservation guidelines are applied, insurance premiums for non-infringement insurance can rise up to 30% or more,” and “In the end, only consumers who will receive damage.”

Financial authorities are weighing three scenarios until they are finally announced. The IFRS17 system development plan prepared this time will be applied from the reconciliation of the year-end accounts.

Reporter Seo Hyeong-kyo [email protected]