New actuarial assumption guidelines introduced to prevent undervaluation of insurance liabilities; conservative standards set for loss ratios on new coverage, with inflation factored into expense assumptions; K-ICS internal model approval criteria established; ORSA mandate expanded

Financial regulators have released new guidelines to refine actuarial assumption standards, preventing insurers from arbitrarily inflating or deflating insurance liabilities. [Created using Gemini]
Financial regulators have released new guidelines to refine actuarial assumption standards, preventing insurers from arbitrarily inflating or deflating insurance liabilities. [Created using Gemini]

Financial regulators have released new guidelines aimed at improving the reliability of actuarial assumptions used to value insurance liabilities and allowing insurers to calculate required capital under the Korean Insurance Capital Standard (K-ICS) using internally developed models.

The Financial Services Commission and the Financial Supervisory Service announced Monday that they would implement revisions to the Detailed Regulations on Insurance Business Supervision as a follow-up to the "Actuarial Supervision Advancement Plan" announced in January this year.

Since the new international accounting standard IFRS 17 — which values insurance liabilities at market prices — and the K-ICS solvency framework took effect in 2023, insurers have been calculating insurance liabilities based on discount rates and actuarial assumptions, including loss ratios and expense figures, at the time of settlement. However, concerns have been raised that without minimum standards, insurers could apply overly optimistic assumptions and undervalue their liabilities, given that actuarial assumptions reflect each company's own forward-looking projections.

Under the revised regulations, insurers must apply conservative loss ratio assumptions to new coverage — defined as risk coverage for which fewer than five years of experience statistics have accumulated. For renewable insurance products other than actual-loss medical insurance, premium renewal assumptions must be made more realistic: if the actual loss ratio falls below the target loss ratio, the assumptions must be structured so that it converges to the target within 10 years. Inflation must also be reflected in expense assumptions, and insurers are prohibited from arbitrarily shortening the period over which costs are recognized.

According to the regulators' analysis, incorporating inflation into expense assumptions would require the industry as a whole to set aside an additional best estimate liability (BEL) of around 2 trillion won, equivalent to about 0.4 percent of total industry BEL of 585.6 trillion won ($379 billion). However, some small and mid-sized insurers and digital insurers with weaker expense structures could see their BEL rise by as much as 4 to 5 percent, raising concerns that the increased liabilities could erode the contractual service margin (CSM) and simultaneously pressure both earnings and financial soundness.

All matters related to actuarial assumptions — including experience statistics, calculation and adjustment methods, and decision-making frameworks — must be documented, and insurers are required to report to their risk management committees the reasons for any assumption changes along with the financial impact. Regulators also plan to complete revisions to the Insurance Business Supervision Regulations this year to introduce an "actuarial assumption report," under which insurers would regularly submit actuarial assumption-related information to the authorities.

Regarding K-ICS required capital calculation, regulators have for the first time established approval criteria for the use of internally developed models. To obtain approval for an internal model, an insurer must demonstrate that the model is actually being used in core decision-making processes such as business planning and product development, and must have in place a system for regular, independent verification of the calculation process.

The internal model approval process proceeds in four steps: preliminary consultation with regulators, submission of application documents, review of whether the criteria are met, and a final approval decision. Even after approval, ongoing oversight continues through regular inspections by regulators and the insurer's own suitability verification. Insurers adopting an internal model must calculate required capital in parallel under both the standard model and the internal model starting from the fiscal year immediately preceding implementation, and report the results to regulators on a quarterly basis.

The revised regulations also clarify the scope of the Own Risk and Solvency Assessment (ORSA) regime, under which insurers evaluate and manage their own risks and solvency. Only insurers with annual premium income of 500 billion won or less, and domestic branches of foreign insurers, may defer implementation — meaning the vast majority of insurers are in principle required to adopt ORSA. Boards of directors and senior management are held responsible for the operation and evaluation results, and those results must be incorporated into risk management objectives and business planning.

The revised regulations take effect in principle from the June year-end settlement, though some provisions will apply from the December settlement to allow the insurance industry adequate preparation time.


psj@heraldcorp.com