[Reporter’s Notebook] Wavering Insurance Accounting Undermines Value-Up Efforts

A representative in charge of investor relations (IR) at a major domestic non-life insurance company recently received a call from Morgan Stanley. The content was that the accounting treatment method based on the new international accounting standard (IFRS17), introduced to the domestic insurance industry since last year, was extremely difficult to understand. Upon hearing that the Korean financial authorities are planning to reform the accounting system within the year and that previously announced performance figures might change, Morgan Stanley reportedly said it was "very strange."

The market is in turmoil over IFRS17. IFRS17 was introduced with the intention of enabling investors to better understand the financial status of insurance companies. However, as the authorities repeatedly intervene in IFRS17, which guarantees the actuarial autonomy of insurers, not only domestic but also foreign investors are questioning the reliability of accounting information. This is because every time the insurance accounting standard changes, the financial information of insurance companies fluctuates.

The recent controversy concerns the "Revision Plan for Lapse Rate Assumptions of No- and Low-Surrender Insurance Products" disclosed by the authorities to the insurance industry. Typically, the lapse rate for no- and low-surrender insurance decreases as the insurance contract ages. In the revision plan, instead of gradually decreasing, the lapse rate sharply drops from the fifth year of the insurance contract. This is due to a very conservative assumption of the lapse rate. This is far from the data accumulated by the non-life insurance industry in the field. The non-life insurance industry agrees that based on statistics from about eight years of selling no- and low-surrender insurance since July 2016, the lapse rate should decrease gradually.

If the authorities' revision plan is actually applied in the field, market confusion is expected to worsen. The recent unusual joint statement opposing the authorities' revision plan submitted by 10 non-life insurers is for this reason. If the lapse rate assumption drops sharply, insurers must reserve more insurance payments to customers in the future. This increases insurance liabilities and reduces available capital, negatively affecting the solvency ratio (K-ICS·KICS), an indicator of insurers' financial soundness. Some small and medium-sized companies that have sold a lot of no- and low-surrender insurance are said to see their solvency ratio fall below the authorities' recommended 150% and turn to losses. An insurance company executive said, "While the optimistic lapse rate assumptions of insurers are criticized, the authorities actually force excessively conservative assumptions," adding, "Is it reasonable to worry about the company going bankrupt because of accounting regulations?"

This situation also runs counter to the government's value-up (corporate value enhancement) efforts. If accounting methods change frequently and do not match the actual corporate situation, trust in the financial information of domestic insurers will inevitably decline. This could even cause foreign investors, who account for 35% of the stock market (KOSPI), as well as domestic individual and institutional investors, to turn away.

Financial Services Commission Chairman Kim Byung-hwan announced at an insurance industry meeting in August that an improvement plan for IFRS17, which caused controversy over "performance inflation" in the first half of the year, would be prepared and applied from this year's year-end closing. Currently, as part of this, various revision plans related to insurance accounting, including assumptions for lapse rates of no- and low-surrender insurance, loss ratio assumptions by age group, and discount rate system reforms, are being discussed. With less than 10 days left in October, it is hoped that the process will not be rushed due to time pressure. Even if it takes a little longer, communicating more with the industry and solidifying trust in insurance accounting will be the first step toward value-up.