'Performance Inflation Controversy' in Insurance Accounting, Improvement Plan to Be Prepared in October and Applied from This Year's Financial Statements

Financial Services Commission Chairman Kim Byung-hwan Holds Insurance Industry Meeting on 28th
Promises IFRS17 Improvements and Insurance Sales Channel Innovation
Also Pursues Life Insurance Fund Securitization Plan

The financial supervisory authorities have decided to finalize improvement measures for the new international accounting standard (IFRS17), which had been controversial due to insurance companies inflating their performance, by October and apply them from this year's financial statements. They will also impose responsibilities on corporate insurance agencies (GA) at the level of financial companies and assign insurance companies the responsibility for managing sales channels. Additionally, plans to securitize life insurance benefits in advance, rather than receiving them only posthumously, are being pursued.

On the 28th, Financial Services Commission Chairman Kim Byung-hwan held a meeting with CEOs of 10 insurance companies, the Life, Non-life, and Fire Insurance Associations, and the Insurance Development Institute, promising to push forward these insurance industry improvement plans. Chairman Kim said, "Although the insurance industry is an industry of trust, there is a need for serious reflection on the regrettable level of public trust," adding, "Since the insurance industry is a long-term investment, please explore ways to contribute to the national economy while conducting stable and long-term asset management."

Kim Byung-hwan, Chairman of the Financial Services Commission. [Image source=Yonhap News]

Chairman Kim announced improvements to IFRS17, which was introduced last year. The core of IFRS17 is changing the evaluation standard of insurance liabilities from cost to market value. However, there have been continuous criticisms that insurance companies inflate accounting profits by, for example, setting high expected lapse rates during this process. The industry consensus is that the record-breaking half-year performance of four major non-life insurers in the first half of this year is not unrelated to this. Chairman Kim said, "The goal is to complete the review of IFRS17 improvement tasks by October, submit them to the Insurance Reform Committee, and apply them from this year's financial statements," emphasizing, "Since the first interest rate cut is expected after the introduction of IFRS17, it is necessary to proactively strengthen risk management such as sound profit increase and liability management."

The insurance sales channels, which have caused incomplete sales and excessive incentive competition, are also set for major innovation. A system of insurance sales specialist companies will be introduced, imposing high responsibilities on GAs. Becoming an insurance sales specialist company entails consumer protection obligations such as maintaining incomplete sales ratios and insurance contract retention rates at certain levels. In return, the authority will increase, and currently, large GAs are seeking to introduce the system. Insurance companies, which have so far blamed GAs for unfair sales practices in sales channels, will also be given responsibility for managing sales channels. Chairman Kim said, "Sales channels are the point of contact and the beginning of relationships with customers, so improving the sales channel system is always an important task for the insurance industry," adding, "Since sales channels are changing significantly with the recent expansion of GA influence, we are comprehensively reviewing sales channel improvements in line with this trend."

Chairman Kim emphasized the need to prepare thoroughly for the future of the insurance industry in response to three major environmental changes: population, technology, and climate. There are plans to promote the activation of insurance sector trusts and the securitization of life insurance benefits. Recently, insurance companies have been entering the trust market, which was previously centered on banks, and support measures are expected to be prepared accordingly. Regarding the securitization of life insurance benefits, it is anticipated that pensions will be provided or early withdrawals allowed using the death benefits of whole life insurance policies whose premium payments have ended as collateral. This is interpreted as an intention to allow life insurance benefits to be received not only after death but also before death. Chairman Kim said, "We plan to consider the 'servicification of insurance,' which combines services such as nursing, caregiving, and rehabilitation with insurance products, rather than limiting the role of insurance to benefit payments," and requested, "Please actively propose institutional improvement plans so that long-term funds from the insurance industry can be supplied to areas requiring long-term investment."

In addition, Chairman Kim hinted at improvements to insurance and comparison recommendation services, which have recently seen low usage. He said they will conduct a comprehensive review of the current status, including automobile insurance and premium systems, to seek improvement measures. He also urged smooth preparation for the simplification of claims for actual loss insurance, scheduled to take effect on October 25. Chairman Kim said, "We are discussing 10 major strategies and over 60 tasks through the Insurance Reform Committee and plan to pursue fundamental institutional improvements," adding, "Please unite and make every effort so that the insurance industry can take a leap forward as a partner of the people."

The insurance industry also responded positively to the Financial Services Commission's improvement plans. Kim Cheol-ju, chairman of the Life Insurance Association, said, "Sufficient consultation is needed to ensure the smooth landing of improvement tasks related to IFRS17 and the new solvency ratio (K-ICS)," and requested, "We ask the financial authorities to actively support new business initiatives such as promoting entry into the silver and nursing care industries to strengthen the role of the life insurance industry in the upcoming super-aged society." Lee Byung-rae, chairman of the Non-life Insurance Association, said, "Through close cooperation with the Medical Reform Special Committee, measures should be prepared to enhance the sustainability of both public and private insurance by strengthening non-reimbursable expense management and improving the structure of actual loss products."