Meritz Financial Vice Chairman Criticizes Insurance Industry: "Profit Inflation Through Long-Term Loss Ratios"

Meritz Financial Group has criticized its competitors regarding long-term loss ratios, which have led to profit inflation and cutthroat competition, even after the introduction of the new IFRS 17 accounting standard in the insurance industry.

On May 14, during a Q&A session at the earnings conference call, Kim Yongbeom, Vice Chairman of Meritz Financial Group, stated, "After reviewing the long-term loss ratio assumptions disclosed by insurance companies this time, I believe that overall accounting consistency remains at only 70%." The long-term loss ratio assumption refers to the estimate of future loss ratios for long-term insurance policies.

Vice Chairman Kim pointed out that the lack of specific guidelines regarding long-term loss ratio assumptions is a problem. Over the past two years, financial authorities have resolved most issues related to indemnity insurance loss ratios and the surrender rates of non-cancellable and low-surrender value insurance policies through insurance reform meetings. However, they have never addressed long-term loss ratio assumptions. Kim said, "As systems related to indemnity insurance loss ratios and non-cancellable surrender rates have been improved, there is now a risk of a balloon effect emerging through long-term loss ratio assumptions, which still lack concrete guidelines." This suggests that as regulations become stricter, there is a possibility that companies may inflate their results through long-term loss ratio assumptions. He added, "In fact, there are cases where the link between current (actual) loss ratios and long-term (expected) loss ratios is significantly weak."

He continued, "While current loss ratios among companies are similar, there are cases where the long-term loss ratio trends are completely opposite," and criticized, "Some companies have assumed expected loss ratios that are significantly lower than their actual loss ratios." According to each company's disclosures, the current loss ratios for long-term insurance products are at similar levels, but there are cases where the long-term loss ratios differ by more than 10 percentage points, resulting in large discrepancies.

Kim emphasized, "There may be differences in methods or perspectives when making future projections, but if the products are largely similar and the gap between actual and expected loss ratios is too wide, the reliability of financial statements will inevitably be undermined," adding, "There needs to be an improvement in the system regarding long-term loss ratio assumptions."

He said, "If loss ratios are estimated irrationally, profits are realized in the current period while losses are deferred to the future. This creates the illusion that long-term products are more profitable than they actually are, and tempts companies to increase sales through price discounts, which leads to cutthroat competition."

Kim Junghyun, CEO of Meritz Fire & Marine Insurance, also stated, "At the end of last year, Meritz Fire & Marine Insurance's actual loss ratio was 90%, while the expected loss ratio was 104%, a difference of 14 percentage points," adding, "This is very conservative compared to other companies." The company explained that while its actual loss ratio is similar to that of its competitors, its expected loss ratio is set 5 to 8 percentage points higher.