FSC passes amendment to insurance business supervision regulations

Mid-year actuarial changes to require risk committee report

Duration gap to become management rating metric from 2028

Riders allowed on converted indemnity insurance products

The Financial Supervisory Service headquarters in Yeouido, Yeongdeungpo-gu, Seoul [Financial Supervisory Service]
The Financial Supervisory Service headquarters in Yeouido, Yeongdeungpo-gu, Seoul [Financial Supervisory Service]

Starting next year, insurance companies will be required to submit an annual report to the Financial Supervisory Service detailing the basis and any changes to the actuarial assumptions used in evaluating insurance liabilities. Their capacity to manage assets and liabilities amid interest rate fluctuations, as well as their oversight of general agencies, will also be incorporated into management performance evaluations for the first time.

The Financial Services Commission passed an amendment to the insurance business supervision regulations Wednesday, incorporating policy reform tasks from the "Plan to Advance Actuarial Supervision in the Insurance Sector" released in January and the "Duration Gap Regulation Plan" published in October last year.

Insurers will be required to prepare a report on the actuarial assumptions applied when calculating policy reserves and risk-based capital requirements, and submit it to the Financial Supervisory Service annually by the deadline for their business reports. The report must include the basis and methodology for each assumption, major changes and verification results, and details related to cash flow modeling and internal controls — all core information for evaluating insurance liabilities. The requirement takes effect starting with the fiscal year 2026 settlement.

Regulators expect the measure to systematize how insurers manage actuarial assumptions and enable early detection of anomalies by allowing cross-company and cross-product comparisons of assumption levels and trends. Since the adoption of International Financial Reporting Standard 17 in 2023, insurers have faced persistent criticism over so-called "rubber-band accounting" — the practice of setting optimistic actuarial assumptions on lapse rates and loss ratios to inflate earnings — and financial authorities have been tightening the standards for calculating those assumptions through guidance.

Internal control procedures for calculating and changing actuarial assumptions will also be established. Insurers must put in place relevant internal control standards, and any mid-year change to actuarial assumptions must be reported to the board's risk management committee, including the reasons for the change, its content and its financial impact. Changes arising from revisions to relevant laws or those with negligible financial impact may be exempt from the reporting requirement.

The management rating system, known as RAAS, will also be strengthened. The FSC has introduced "duration gap" as a new quantitative indicator for interest rate risk assessment. Duration gap measures the difference in duration — the sensitivity of asset and liability values to interest rate movements — between assets and liabilities, showing how much net asset value changes when interest rates shift. Given current interest rate conditions and the need to allow insurers adequate preparation time, the indicator will take effect Jan. 1, 2028.

Under the management risk category, "adequacy of general agency operational risk management" will be added as a non-quantitative evaluation item. The move comes as concerns over consumer harm from excessive competition have grown alongside insurers' expanding reliance on general agency sales channels. The FSC plans to strengthen the management responsibilities of insurers that delegate sales to general agencies in order to prevent consumer harm and encourage improvements in unsound sales practices.

Regulations on indemnity insurance product design have also been revised. Indemnity insurance has been required to be structured as a standalone product to prevent consumer harm such as bundling with other products. However, given that a contract conversion discount program set to take effect this month involves switching existing indemnity policies — most of which were sold as riders — to fifth-generation indemnity coverage, the relevant indemnity products will be exempt from the standalone design requirement and may instead be attached as riders to existing main contracts. The contract conversion discount program offers a 50 percent reduction on fifth-generation premiums for three years to holders of first- or second-generation indemnity policies signed before March 2013 who switch to fifth-generation coverage.

In addition, the method for calculating annual appropriations to catastrophe reserves has been revised so that the amount is based on the premium subject to appropriation in the relevant year. In preparation for the adoption of International Financial Reporting Standard 18 in 2027, the regulations governing the classification of items on the statement of comprehensive income and the criteria for separating profit and loss by account in earnings analysis have also been updated.

The amendment takes effect on the date of its official promulgation. However, internal controls for actuarial assumption calculation and changes, the addition of general agency operational risk as an evaluation item, and revisions to financial statement preparation standards will apply from Jan. 1, 2027, while the duration gap indicator will apply from Jan. 1, 2028. A proposed cap on insurers' real estate project financing credit exposure, which had been included in the regulatory change notice issued in September, is being processed through a separate amendment to the supervision regulations, with a target effective date of Jan. 1, 2027.


won@heraldcorp.com