Financial Regulators Announce “Guidelines on Key Actuarial Assumptions under IFRS 17” and “Soft-Landing Plan for Rationalization of Insurance Liability Discount Rates”

The Financial Services Commission (the “FSC”) and the Financial Supervisory Service (the “FSS”) held the Fourth Insurance Reform Conference on November 4, 2024 to increase the reliability and stability of insurance accounting. At the conference, the FSC and the FSS finalized and announced the “Guidelines on Key Actuarial Assumptions under IFRS 17” (the “Guidelines”) and the “Soft-Landing Plan for Rationalization of Insurance Liability Discount Rates” (the “Plan”).

Since the kick-off meeting held in May 2024, when the FSC and the FSS announced the “recovery of trust through soundness management” as one of the key objectives of the Insurance Reform Conference, a task force comprised of academia, industry actors and experts has finally developed the Guidelines and the Plan in terms of the accounting system.

Key details of the Guidelines and the Plan are as follows:

Guidelines on Key Actuarial Assumptions under IFRS17

To address the industry practice of applying high surrender rates to insurance products having little to no cash surrender value, the following measures have been introduced:

–

In principle, surrender rates should be estimated using a log-linear model (with a converging point of 0.1%).

–

Even though a linear-log model (convergence point of 0%) or a log-log model (convergence point of 0.1%) may be exceptionally applied, insurers will be required to (i) publicly disclose any differences compared to applying a log-linear model (e.g., differences in terms of contract service margin (“CSM”), Korea Insurance Capital Standard (“K-ICS”) ratio, net income) in their audit reports, and (ii) report such differences to the FSS quarterly.

To address the industry practice of applying low surrender rates at the time of bonus payments for whole life insurance policies with short-term premium payment, the following measures have been introduced:

–	Insurers will be required to reverse-calculate surrender rates based on cumulative persistency rates of standard-term insurance products or set surrender rates to be 30% or higher.

Soft-Landing Plan for Rationalization of Insurance Liability Discount Rates

The initial plan was to extend the last observed term (used for determining discount rates for mark-to-market valuation of insurance policies) from 20 years to 30 years by 2025. However, in light of the current interest rates, the extension will be phased in gradually over three years.

The Guidelines will come into effect beginning with the FY 2024 settlement. However, for claim ratio assumptions, if insurers have physical limitations (e.g., limitations to change their settlement systems), such assumptions may be reflected by the first quarter of 2025. In addition, the Plan will take effect from January 2025.

Therefore, insurers are advised to remain fully aware of and comply with the Guidelines and the Plan.

[Korean Version]

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