[1mm Finance Talk] Insurance Industry on Edge over FSS Restructuring... Signal of Stronger Oversight on Indemnity Insurance and Accounting

Expansion of "Flexible Accounting" and Indemnity Health Insurance Divisions
Industry on Alert as Former Director Moves to Supervision Bureau
Governor's "Zero Tolerance for Accounting Irregularities" Remarks Draw Attention

The Financial Supervisory Service (FSS) has implemented a major organizational restructuring to significantly strengthen its consumer protection division, along with executive and department head appointments, causing the insurance industry to be on high alert. In particular, the industry is closely watching the expansion and reorganization of departments responsible for indemnity health insurance and International Financial Reporting Standards (IFRS), as well as the reassignment of key directors.

According to the financial sector on December 29, the insurance industry is paying close attention to the FSS's recent sweeping organizational changes, which took place from December 22 to 24. These include elevating the Financial Consumer Protection Bureau to a general headquarters, expanding and reorganizing the insurance actuarial and product supervision division, and establishing a new Product Dispute Bureau. The industry is also focused on major personnel appointments, such as the Deputy Governor in charge of public welfare and insurance, the Director General of Insurance Supervision, and the Director General of Actuarial Risk Supervision.

Regarding the reorganization, it is noted that the addition of Product Dispute Bureaus 1 and 2, while maintaining the existing three Inspection Bureaus (which oversee insurance company regulations), is increasing the burden on the industry. Recently, the Ministry of Health and Welfare decided to designate three non-covered items-manual therapy, radiowave hyperthermia, and percutaneous epidural neuroplasty-as managed benefits. However, as the adoption of advanced regenerative medical technologies and new medical technologies expands, the possibility of insurance claim disputes is rising in areas where medical institutions set medical expenses arbitrarily.

Regarding the FSS's reinforcement of these dispute-related divisions, an industry insider expressed concern, saying, "The number of disputes over insurance payouts may increase."

The expansion and reorganization of the Insurance Actuarial and Product Supervision Bureau is also a major focus for the industry. This division has been reorganized as the Actuarial Risk Supervision Bureau, with the addition of an internal Insurance Actuarial Audit Team. Previously, the Insurance Actuarial and Product Supervision Bureau was deeply involved in a wide range of matters, including designing fifth-generation indemnity health insurance with the Financial Services Commission's Insurance Division, discussing managed benefit items with the Ministry of Health and Welfare, addressing accounting irregularities at Samsung Life Insurance, and loss ratio assumptions at Meritz Fire & Marine Insurance. With the reorganization, the Actuarial Risk Supervision Bureau will now be exclusively responsible for accounting, raising the possibility of stricter supervision and sanctions.

Additionally, the transfer of Director Lee Kwonhong, who was previously head of the Insurance Actuarial and Product Supervision Bureau, to the position of Director General of Insurance Supervision, is seen as an unusual personnel move. Director Lee has been a key figure in handling both indemnity health insurance and the so-called "flexible accounting" practices, where insurance companies assume low long-term loss ratios and thus calculate excessive contractual service margins (CSM). If an insurance company assumes a low loss ratio, its insurance liabilities decrease and its CSM increases. The loss ratio is the proportion of insurance premiums received from customers that is paid out as claims; a higher loss ratio negatively impacts an insurer's profitability.

The Insurance Supervision Bureau is a senior division that not only inspects individual insurance companies but also plans and regulates industry-wide policies. Director Lee's transfer is interpreted as a signal that the FSS is placing relatively greater emphasis on indemnity health insurance and accounting issues, rather than other matters such as corporate insurance agencies (GAs), long-term care insurance, or death benefits.

In fact, following the reorganization, the FSS issued guidelines to all insurers, instructing them to conservatively apply a minimum loss ratio of 90% for new coverage. This is based on the assessment that some insurers have been using lax loss ratio assumptions below 90%, resulting in excessive CSM calculations.

Insurance companies also cite FSS Governor Lee Chanjin's repeated warnings that accounting irregularities at Samsung Life Insurance and a sales focus on short-term profitability could lead to mis-selling, improper policy replacements (insurance switching), and premium increases, as additional sources of pressure. It is explained that the recent organizational restructuring and personnel transfers are being interpreted as the Governor's "zero tolerance for accounting irregularities" message being put into action.

An insurance company representative commented, "As the level of supervision and sanctions regarding actuarial loss ratio assumptions is rising, the entire industry is closely monitoring the situation and considering how to respond."