Sehun Lee, Senior Deputy Governor of FSC, Hosts Insurance Industry Executives Meeting on 11th
If 'Exception Model' Selected, May Include Next Year's Priority Inspection Targets Depending on Case
After the financial authorities recently announced improvement measures for the lapse rates of no-surrender and low-surrender insurance policies, some insurers reportedly indicated they would choose the exception model rather than the principle model proposed by the authorities. In response, the Financial Supervisory Service (FSS) has stepped in to curb this. The FSS plans to select insurers that choose the exception model as priority inspection targets next year, depending on the case.
On the 11th, the FSS held a meeting chaired by Senior Deputy Governor Lee Se-hoon on the theme of "Stabilization of International Financial Reporting Standards (IFRS17) in a period of falling interest rates and risk management of insurers," with executives from major insurers and accounting firms. The meeting was organized to hear industry opinions on the confusion related to IFRS17, the impact of institutional improvements, and the soundness of insurers amid falling interest rates, as well as to convey requests from the authorities.
The FSS emphasized the urgent need for self-regulatory efforts to prevent IFRS17 from being exploited as a tool for short-term performance competition. An FSS official said, "Despite the authorities presenting a principle model regarding the improvement of lapse rates for no-surrender and low-surrender insurance, there is significant media skepticism that some companies will choose the exception model out of concern for short-term performance deterioration. Since the market views this issue as a milestone for restoring trust in the insurance sector and is closely watching, we expect that insurers will not make the foolish mistake of choosing the exception model to conceal immediate performance declines."
On the 7th, the financial authorities presented a "principle model" (log-linear model) for lapse rates of no-surrender and low-surrender insurance products through the "Guidelines on Major Actuarial Assumptions for IFRS17." The principle model conservatively improves the lapse rate assumptions that insurers had previously used. However, the authorities allowed insurers to choose an exception model based on their own statistics instead of the principle model. In such cases, insurers must comply with strict FSS standards, including presenting reasonable statistics and undergoing on-site inspections. Although the authorities recommended following the principle model, they appear to have increased pressure after some insurers announced their intention to choose the exception model.
The FSS set the following criteria for selecting priority inspection targets next year: ▲ insurers applying the exception model instead of the principle model for estimating lapse rates of no-surrender and low-surrender insurance, with a large difference in Contractual Service Margin (CSM) compared to the principle model ▲ insurers highly dependent on sales channels that cause consumer harm such as incomplete sales ▲ insurers that set excessively high growth rates for gross written premiums and other external growth indicators when establishing their 2025 management plans. An FSS official explained, "This measure is to prevent insurers from applying unreasonable actuarial assumptions for short-term performance competition, which would undermine the reliability and stability of insurance accounting."
Insurers criticized the FSS’s stance. A representative from insurer A said, "Each company faces different circumstances, so forcing them to use only the principle model overturns the basic premise of IFRS17. There are widespread rumors that the authorities are heavily influenced by certain insurers insisting on the principle model." A representative from insurer B said, "When the Financial Services Commission announced the lapse rate improvement plan on the 7th, it allowed the use of the exception model if certain conditions were met, but now the FSS is pressuring companies to use only the principle model. What kind of situation is this? The conflicting signals from the financial authorities are causing insurers to be caught in the middle, which negatively affects the credibility of insurance accounting."
At the meeting, the FSS also mentioned the importance of proactive risk management such as strengthening Asset-Liability Management (ALM) and capital augmentation. The FSS expressed regret that despite repeated deterioration of financial soundness in the insurance sector during past interest rate fluctuations, market risk management remains insufficient. An FSS official said, "Insurers that appropriately matched duration (the period to recover principal relative to investment) showed minimal or even improved solvency ratios (K-ICS) during interest rate declines," adding, "In a situation where financial market uncertainty is increasing, more active risk management is required."
Participants agreed that the introduction of IFRS17 has increased the impact of interest rate fluctuations on insurance liabilities, and that the increased volatility over the past two years has posed operational challenges.
An FSS official stated, "We plan to steadily implement the decisions made at the recent insurance reform meeting to break the vicious cycle of neglecting risk management, deteriorating soundness, and regulatory forbearance."
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