Meeting held with actuarial heads of life and non-life insurers

On-site inspection findings shared across six companies

Actuarial assumption reports to be formalized by end of December; continuous monitoring indicators to launch next year

Year-end insurance liabilities to face intensive review; violations to draw strict sanctions

The Financial Services Commission at Government Complex Seoul in Jongno-gu [Yonhap]
The Financial Services Commission at Government Complex Seoul in Jongno-gu [Yonhap]

The Financial Supervisory Service said Thursday that insurers still show deficiencies in how they calculate actuarial assumptions — including loss ratios and expense assumptions — and ordered the industry to carry out self-improvement. All insurers must conduct internal reviews based on the deficient cases shared this month and submit improvement plans by the end of November. The FSS plans to conduct an intensive review of insurance liability valuations at the year-end settlement and impose strict sanctions on any insurer found to have calculated them improperly.

The FSS held a meeting Thursday with actuarial heads from 22 life insurers and 17 non-life insurers, along with representatives from the Korea Life Insurance Association, the General Insurance Association of Korea, the Insurance Development Institute, and auditors from major accounting firms responsible for insurance liability audits. The financial regulator announced a plan to modernize actuarial supervision in January and has been implementing related amendments to its operational rules since the end of June. The meeting was organized to share key cases and gather industry feedback to help the revised standards take hold in day-to-day practice.

The FSS's actuarial audit team conducted on-site inspections in September at six insurers — three life and three non-life — to assess compliance with the reform measures. The review found cases in which insurers failed to break down calculation units for sub-coverage items even when the statistical sufficiency and significance requirements had been met.

Subdividing calculation units was an issue the regulator had flagged when it announced the modernization plan in January, noting that while some insurers had more than 1,100 loss ratio assumptions, others had as few as 41. Separately, some insurers were found to have determined the timing for applying the final loss ratio solely on an aggregate coverage basis, without properly extending it to reflect statistics at the individual sub-coverage level.

For renewable products, inspectors flagged cases in which the convergence period for loss contracts to reach a target loss ratio of 100 percent was uniformly set at 10 years — a timeline that cannot be achieved through premium adjustment rates alone. In practice, the 100 percent threshold would not be reachable for 13 years given the applicable adjustment rates, yet the convergence period was set at 10. There were also cases in which insurers failed to properly incorporate actual loss experience even after three or more years of data had accumulated for new coverage items, due to rigid internal standards.

Problems also emerged in expense assumptions. Inspectors found cases in which insurers excluded all contract acquisition costs from inflation adjustments on the grounds that they are recognized as expenses within one year, and cases in which inflation was not applied to employee welfare costs and commissions without any quantitative assessment by account — relying solely on internal payment caps or commission freezes as justification. Some insurers showed large year-on-year swings in the allocation ratios for shared costs, and others classified shared labor costs as contract acquisition costs using a method similar to surveys that the operational rules explicitly prohibit. Inspectors also noted cases in which a single cost driver — earned premiums — was applied to certain taxes and public charges without regard to statutory formulas or the nature of the expenditure.

In response, the FSS issued recommendations covering five areas: subdividing calculation units when statistical requirements are met; setting a reasonable convergence period that accounts for renewal timing and premium adjustment rates; conducting quantitative analysis by account when inflation is not applied; improving the stability of shared-cost allocation criteria; and establishing composite cost drivers that include the number of policies in force.

Regulatory reforms are also moving forward. Following amendments to the Insurance Business Supervision Regulations and their operational rules, actuarial assumption reports will be formally required starting at the end of December. The reports will cover the actuarial assumption framework, calculation standards and results, cash flow models, and internal controls. The FSS noted that sanctions are available for insurers that submit false reports or miss submission deadlines, as filing is legally mandated.

A continuous monitoring indicator system for actuarial audits will also be introduced to quantitatively measure each insurer's actuarial assumption management. The system will cover three areas — the adequacy of actuarial assumptions, the adequacy of actual-versus-expected variance management, and the adequacy of contractual service margin management — with three to five indicators per area. The FSS said it has prepared a first draft and plans to finalize it after gathering industry feedback, with full operation set to begin next year. Ratings produced through regular assessments will be used for cause analysis and follow-up action, as well as for selecting themes and target companies for ad hoc inspections and identifying audit focus areas.

The FSS said it will clarify standards on matters that may give rise to differing interpretations in practice, to ensure consistent application across companies, and will distribute the final template for actuarial assumption reports so insurers can prepare their year-end filings based on the December deadline. Management interviews have already been conducted at the companies subject to on-site inspections.

"We will conduct an intensive review at the year-end settlement to assess whether insurers have reasonably and appropriately reflected the actuarial supervision modernization measures in their insurance liability valuations," an FSS official said. "Insurers found to have calculated insurance liabilities improperly or with confirmed errors will face strict sanctions where necessary, through intensive audits and examinations."


won@heraldcorp.com