[Reporter’s Notebook] Insurance Reform Council Ends After Less Than a Year

Insurance Reform Achieves Results, But Accounting Issues Remain
No-Surrender and Low-Surrender Insurance Lapse Rate Guideline Fails to Meet Goals
Insurance Industry Calls for Increased Communication Under Permanent System

The Insurance Reform Council, which has been underway since May last year to address challenges facing the insurance industry, recently concluded its 7th meeting. Financial authorities have achieved considerable results, such as developing insurance products related to low birth rates and aging populations and proposing measures to improve unhealthy sales practices. At the final meeting, the authorities self-assessed that 23 out of 74 tasks had been institutionalized and announced plans to transition the meetings to a permanent system going forward.

The insurance industry has largely criticized this decision as irresponsible. They argue that frequent changes to insurance accounting standards caused market confusion, and instead of properly managing the aftermath, the authorities hastily ended the regular meetings. A representative example is the no-surrender and low-surrender insurance lapse rate assumption guideline introduced at the 4th meeting in November last year. At that time, the authorities believed insurers had optimistically assumed lapse rates to inflate performance and introduced measures to encourage more conservative assumptions.

The market confusion stemmed from discord among financial supervisory authorities. When the Financial Services Commission announced the measures, it required insurers to choose between the 'principle model' and the 'exception model' for lapse rate assumptions. Later, as many insurers sought to select the exception model to reflect their unique circumstances, the Financial Supervisory Service pressured them to choose the principle model. Ultimately, all insurers except Lotte Insurance adopted the principle model. Subsequently, these insurers had to individually explain the potential performance fluctuations due to accounting standard changes to global investment banks (IBs).

In the end, the guideline failed to achieve its goal of preventing performance inflation. Most insurers suspected of inflating results posted record-high earnings last year. Rather, the application of the guideline caused the solvency ratio (K-ICS) to decline, worsening insurers' soundness. Consumer benefits also decreased. From April, products reflecting the no-surrender and low-surrender insurance lapse rate assumption guideline will be released, with premiums rising about 10-20% compared to before. An executive from an insurance company said, "It is questionable who these measures were really for," adding, "No one has benefited from the application of the guideline."

The improvement plan for surrender value reserves prepared at the 3rd meeting also sparked controversy. Surrender value reserves are funds insurers set aside in advance to refund customers when they cancel insurance contracts. With the introduction of International Financial Reporting Standards (IFRS17), the reserve size increased, causing a reduction in tax revenue and dividend capacity. The authorities announced an improvement plan last September, but it proved ineffective. They stipulated that if K-ICS exceeds 200%, only 80% of the reserves need to be set aside, but as of the fourth quarter last year, only Samsung Fire & Marine Insurance and DB Insurance met this criterion. Consequently, many insurers were unable to pay dividends at year-end, and K-ICS declines due to the no-surrender and low-surrender insurance guideline followed. In response, the authorities announced at the 7th meeting that they would lower the K-ICS threshold back to 170%.

Many of the side effects caused by accounting changes were anticipated before and after the implementation of the measures. Industry insiders agree that the authorities hastily executed the measures without adequately reflecting voices from the field. There is also concern that transitioning the Insurance Reform Council from a regular, official channel to a less publicly noticed permanent system may result in a meeting body tailored to the authorities' preferences, potentially causing further side effects. To dispel such misunderstandings, it is hoped that the authorities will communicate with the industry more frequently than the current 1-2 month intervals.