Controversy Grows Over "Rubber-Band Accounting" Due to Optimistic Actuarial Assumptions by Insurers
Regular Audits to Begin in First Half; Actuarial Assumption Report System to Be Introduced in Q2
The financial supervisory authorities are set to further strengthen their inspection system for actuarial assumptions used by insurance companies in calculating future profits and losses. If any illegal acts are identified-such as insurance companies arbitrarily manipulating actuarial assumptions to inflate profits-sanctions will be imposed. This is to prevent so-called "rubber-band accounting," where companies artificially boost profitability indicators on their books by using optimistic lapse rate assumptions and similar methods.
On March 2, the Financial Supervisory Service announced the establishment of an "Actuarial Audit Team" as part of its "2026 Actuarial Audit Work Plan," stating, "We will launch regular audits in the first half of the year to intensively inspect the actual application of actuarial assumptions by insurance companies." The newly established Actuarial Audit Team will be exclusively responsible for inspecting the overall operation of actuarial assumptions at insurance companies. In particular, the team will focus on whether companies are properly complying with the soundness standards stipulated in the Insurance Business Act, supervisory accounting rules, and other relevant laws and regulations when assessing insurance liabilities.
Actuarial assumptions are standards that convert how an insurance company predicts future events such as mortality rates, loss ratios, lapse rates, and interest rates into numerical values. Since the implementation of the new International Financial Reporting Standard (IFRS 17), the importance of actuarial assumptions in assessing insurance liabilities has increased. However, even after the introduction of IFRS 17, controversy continued as some insurance companies arbitrarily applied optimistic assumptions to boost insurance contract service margins (CSM), a key profitability indicator, giving rise to ongoing concerns about "rubber-band accounting."
When insurance companies assess insurance liabilities and assume that the future payouts to customers will be lower, their CSM increases, making it appear as if their book performance has improved. Since insurance contracts typically last for several decades, any change in actuarial assumptions can significantly alter a company’s profitability and soundness indicators. According to the Financial Supervisory Service, even lowering the loss ratio assumption by just 1 percentage point can result in the insurance profit and loss increasing by around 5 percent.
There have also been criticisms that some insurance companies have inflated their short-term performance by applying excessively optimistic actuarial assumptions. In 2024, some insurers applied optimistic lapse rate assumptions to short-term premium whole-life insurance products, boosting profitability and then aggressively marketing these products, which raised concerns about consumer harm.
The Financial Supervisory Service plans to focus on several areas: the rationality and consistency of the actuarial assumption calculation process; whether the cash flow model aligns with policy terms and calculation statements; the appropriateness of the overall actuarial assumption system; and whether the internal control system is functioning properly.
If the audit results confirm severe violations of the Insurance Business Act, the Act on Corporate Governance of Financial Companies, or other major regulations, the authorities plan to impose strict sanctions on the relevant institution and its executives and employees. Until now, actuarial assumptions have been regarded as estimates based on future projections, and the IFRS 17 regime has operated on a principle-based approach with a focus on autonomy for insurance companies, so improvements were typically recommended rather than enforced. However, going forward, the discovery of illegal acts will lead to substantive sanctions.
The Financial Supervisory Service plans to commence regular audits in the first half of the year. In addition, the audit approach will be divided into regular and ad-hoc inspections, and the audit cycle targets will be differentiated based on the asset size of each insurer to enhance the efficiency of inspections. Furthermore, in the second quarter, the Financial Supervisory Service plans to introduce an "Actuarial Assumption Report" system to systematically verify the appropriateness of actuarial assumptions.
An official from the Financial Supervisory Service stated, "We will continue to work towards establishing rational and reliable insurance liability assessment practices by sharing best practices in actuarial audit work."
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