On the 26th, the Financial Supervisory Service (FSS) announced that it has revised the detailed enforcement rules related to the insurance business supervision, including the reserve for liabilities and solvency system based on the fair value evaluation of insurance liabilities, to enhance comparability among insurance companies and strengthen financial soundness.
First, the FSS specified the calculation criteria for the Loss Development Factor (LDF) of the reserve for liabilities. The LDF is used to calculate the best estimate insurance liabilities based on the expected future additional claim payment rates. Until now, IFRS 17 did not provide specific criteria for calculating the LDF, so insurance companies have been calculating it arbitrarily. For example, insurance companies have arbitrarily decided whether the claim date is the cause date or the payment reason date.
Accordingly, the FSS improved the criteria so that the claim date for calculating the LDF should, in principle, be the date when the obligation to pay insurance benefits arises according to the individual insurance policy, and subsequent insurance payments should be attributed to the initial claim date considering the payment conditions stipulated in the policy.
The criteria for calculating the discount rate for insurance liabilities will also be improved. Since there is a limit on the annual adjustment range of the Long-Term Forward Rate (LTFR), which is the discount rate applied to long-term liabilities (over 60 years), and opinions have persisted that the long-term discount rate is higher than the economic reality, the criteria for calculating the discount rate have been improved to allow differential adjustment of the LTFR.
In addition, simplified calculation criteria for asset and liability valuation have been added, and the shock levels for mass lapse risk of savings-type insurance and protection-type insurance have been differentiated. Savings-type insurance is more sensitive to economic fluctuations and is more likely to experience mass lapses in crisis situations than protection-type insurance, but the same shock level (30%) has been applied to both.
Therefore, the FSS decided to apply differentiated shock levels of 35% for savings-type insurance and 25% for protection-type insurance to more accurately measure losses caused by mass lapses.
The revised detailed rules will be applied from January 1 of next year, and some revisions, such as the differentiation of mass lapse risk shock levels, can be applied from the financial statements closing at the end of December this year.
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