FSS: "IFRS17 Improvements Make Financial Fluctuations Inevitable for Insurers"

Strengthening Supervision through Regular Meetings and Hotline Establishment

The Financial Supervisory Service (FSS) expects that changes in financial conditions will be inevitable during the 2024 accounting settlements of insurance companies due to improvements in the International Financial Reporting Standards (IFRS 17) system. Accordingly, it plans to strengthen supervision by holding regular meetings.

On the 5th, the FSS announced that it is efficiently and systematically responding by identifying potential IFRS 17 issues and focusing supervisory capabilities according to the characteristics of the issues and their financial impacts.

Last year, from May to June, the FSS identified potential issues through relay meetings with producers (insurance companies), verifiers (accounting and actuarial firms), and users (analysts) of insurance financial information. It also reviewed the identified issues with the Big Four accounting firms, which serve as external auditors for insurance companies, and, considering the importance of the matters, submitted major issues to joint consultative bodies and Q&A joint meetings for discussion. Last month, it also went through Q&A joint meetings and accounting review committee deliberations regarding the accounting treatment of differences between expected and actual disclosure rates (interest rates for interest-linked insurance). In this review, it was concluded that the entire effect of the difference in disclosure rates occurring during the current period cannot be immediately recognized in profit or loss (PL), and that it is necessary to systematically allocate it between profit or loss and other comprehensive income (OCI), similar to other insurance financial gains and losses.

IFRS 17 system improvements were also made through the Insurance Reform Council. Assumptions on lapse rates for no-surrender and low-surrender insurance were rationalized, and a smooth landing plan for the realization of discount rates was prepared. Improvement measures for the rational execution of business expenses were developed, and transparency and accountability of insurance accounting will be strengthened through expanded disclosure of key financial information and enhanced external verification.

The FSS expects that with active guidance from authorities and implementation by the insurance industry, many accounting issues in the early stages of implementation will be largely resolved. However, for some insurance companies that had applied irrational accounting assumptions to maximize short-term performance, changes in financial conditions are expected to be inevitable during the 2024 accounting settlements when the revised guidance standards are applied.

Accordingly, the FSS plans to focus supervisory capabilities to ensure that settlements are completed without issues. It will hold regular weekly meetings with external auditors of insurance companies to proactively check and discuss major audit issues for the 2024 settlements. It also plans to promptly identify, review, and respond to major inquiries and issues related to settlements from the insurance industry.

An FSS official stated, "Considering the importance of IFRS 17 basic assumptions and recent financial market uncertainties, we will promptly prepare measures to strengthen supervision and inspection of insurance actuarial practices to stabilize the fair value evaluation system of insurance liabilities."