Authorities “Insurance companies cannot interpret actuarial assumptions optimistically”
Conservative management Meritz Fire & Marine Insurance also ‘careful in management’
Industry: “Accounting regulation confusion… soft landing needed”
Since the introduction of the new International Accounting Standard (IFRS17), financial authorities have criticized insurance companies for their ‘optimistic assumptions’ and warned them against inflating their performance. However, on the contrary, there is a precedent of issuing management cautions to insurance companies that applied ‘conservative assumptions’, so the industry appears to be in confusion. . As the industry’s concerns about actuarial assumptions deepen, it is also pointed out that additional alternative measures for a soft landing of the system are inevitable.
According to the financial sector on the 27th, domestic insurance companies are conducting simulations through accounting firms to apply the actuarial assumption guidelines presented by the authorities ahead of year-end settlement. As financial authorities have warned insurance companies against arbitrarily applying optimistic assumptions, work on new accounting using ‘conservative assumptions’ is in full swing.
However, controversy over the authorities’ standards still remains. This is because the authorities warned against insurance companies’ optimistic as well as conservative assumptions. Previously, Meritz Fire & Marine Insurance received 18 management precautions from the Financial Supervisory Service in September, including strengthening the effectiveness of board operations and reorganizing the performance compensation system. Among them, ‘establishing actuarial assumptions and strengthening verification procedures’ is also included.
IFRS17 is a system that evaluates insurance companies’ liabilities at market value, and the performance of insurance companies depends on how actuarial assumptions are reflected. After the system is implemented, insurance companies must evaluate insurance liabilities according to optimal actuarial assumptions, but in the case of Meritz Fire & Marine Insurance, the authorities explained that the assumptions were set conservatively, unlike the actual facts. In fact, Meritz Financial Vice Chairman Kim Yong-beom said in a conference call last year, “Meritz is using (actuarial assumptions) very conservatively, to the extent that the actual loss ratio compared to the plan is only 90%.”
Regarding the management caution, the authorities pointed out, “If a company intentionally sets actuarial assumptions conservatively or aggressively, unlike the actual, there is a risk that insurance liabilities may appear distorted.” This is the first sanction imposed on insurance companies’ actuarial assumptions since the introduction of IFRS17.
Financial authorities have pointed out that insurance companies, concerned about a sharp decline in performance after changes to the accounting system, applied optimistic assumptions and inflated some of their performance. In particular, if an insurance company assumes an excessively low loss ratio, a large difference between expectations and actual results will occur. On the other hand, in the case of Meritz Fire & Marine Insurance, a conservative assumption was made that the loss ratio would be rather high, but the resultant difference between expectations and actual results was large, so it was a case that received management attention from the authorities.
Afterwards, the authorities this month even established guidelines for the cancellation rate of no-cancellation products, which have a high proportion of sales, to prevent insurance companies’ optimistic assumptions. Non-cancellation products are characterized by lower insurance premiums than regular products, with no or low refund when the subscriber cancels. Since it is a product with no refund, it is considered a product with higher margins from the insurance company’s perspective as there are more cancellations.
The authorities believed that insurance companies had inflated their performance by optimistically assuming the cancellation rate of this product, and presented a ‘principle model’ as a guideline to apply conservative assumptions. This model applies the ‘log-linear model’ in which the cancellation rate at the time of full payment converges to 0% when calculating the cancellation rate for no-cancellation products.
Although it has been said that the exception model is allowed considering the characteristics of some insurance companies, in fact, if the principle model is not applied, the industry is in full swing as it can become a ‘focus target’ subject to priority inspection by the authorities.
Prior to the announcement of the guidelines, the authorities are said to have emphasized conservative assumptions with the strong phrase, “Saving less and saving later is a reasonable choice” during a meeting with insurance industry executives early this month. In fact, since the principle model presented by the authorities enforces conservative assumptions, lowering the expected cancellation rate of no-cancellation products is expected to result in a sharp increase in the liabilities of some insurance companies and a decrease in contractual service margin (CSM).
The problem is that, ultimately, the expansion of actual vehicles is inevitable. The industry’s position is that it is confusing that both conservative and optimistic assumptions may become subject to sanctions if the actual difference increases. An official in the insurance industry said, “The authorities expect that there will be a gap in reality for several years if conservative assumptions are applied, but there is a precedent in which an insurance company with a large gap in reality has been imposed management caution, so it is bound to be confusing for the industry.” He said, “It appears that confusion regarding the application of these guidelines can be reduced only if there is an alternative plan that can lead to a soft landing, such as a plan for authorities to present a no-action statement.”
Reporter Jang Seul-gi [email protected]
