[Reporter’s Notebook] Flexible Accounting Controversy in Insurance... What Matters Is Not Optimism or Conservatism, but 'Accountability in Explanation'

The insurance industry is currently embroiled in a heated debate over assumptions regarding the expected loss ratio for long-term insurance. The controversy was sparked by comments made by Kim Yongbeom, Vice Chairman of Meritz Financial Group, during the first quarter earnings conference call, suggesting that some insurers are inflating their results based on overly optimistic loss ratio assumptions. Following his remarks, opinions within the industry have become divided over whether optimistic or conservative loss ratio assumptions are more appropriate.

Long-term insurance products sold by insurers are structured to generate revenue (premiums) and incur expenses (insurance payouts) over extended contracts, such as “20-year payment, coverage until age 100.” Under the International Financial Reporting Standards (IFRS 17) introduced in 2023, insurers are allowed to autonomously set assumptions about how much premium income will be received and how much will be paid out in claims in the future. For example, if Insurer A expects to collect 10 billion won in premiums over 100 years and pay out 8 billion won in insurance claims, this is considered an “optimistic” assumption. Conversely, if it assumes it will pay out 12 billion won, it is regarded as a “conservative” assumption.

Regardless of the approach, the most rational outcome would be for the difference between the assumptions and actual figures to be as close to zero as possible. However, insurance accounting is not that simple. The assumed method affects the Contractual Service Margin (CSM), which is the basis of insurer profits, the capital adequacy ratio (K-ICS), and premiums. An optimistic assumption can increase both the CSM and K-ICS, while lowering premiums to enhance product competitiveness. However, this approach is often criticized for recognizing profits in advance and deferring losses.

At first glance, insurers that adopt conservative assumptions may appear more reasonable, as they are free from allegations of inflating results and seem to manage risks more thoroughly. However, conservative assumptions are not a panacea. If an insurer assumes a higher loss ratio, premiums will rise accordingly. Moreover, excessively conservative assumptions widen the gap between expected and actual loss ratios, which immediately increases the resources available for dividends in the current accounting period. Although this does not directly inflate the CSM as optimistic assumptions do, it still recognizes a portion of the CSM?which should be reflected in profits over several years?immediately, effectively “borrowing from future profits.”

Therefore, there is no definitive answer as to whether optimism or conservatism is better. For insurance customers, optimistic assumptions that result in lower premiums are advantageous. For investors, conservative assumptions that secure robust dividend capacity are more appealing.

Given this, insurers should focus less on debating the superiority of one set of assumptions over another and instead prioritize “accountability in explanation.” They must clearly explain why they have chosen certain assumptions, what statistics were used in making these choices, and how these assumptions will affect consumers and investors. The reason financial authorities have recently required insurers to substantiate the basis for their assumptions is precisely this. As of now, no insurer has fully met this “accountability in explanation.” If they avoid providing rational and logical explanations for their chosen assumptions, it is a clear case of dereliction of duty.