Following the implementation of IFRS 17 and K-ICS, ongoing concerns have been raised regarding the potential understatement of insurance liabilities and limited comparability among insurers due to disparities in actuarial assumptions. To address these concerns, the financial supervisory authority announced the "Enhanced Actuarial Supervision Framework for the Insurance Industry" to ensure a more rigorous setting and management of actuarial assumptions for insurance products.
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Basic Principles for Actuarial Assumptions
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When setting actuarial assumptions, insurance companies shall adhere to the "best estimate" approach as the overarching principle, while also establishing three core sub-principles: neutrality, prudence, and comparability.
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Where sufficient empirical data is available, such data should be reflected on an objective basis. Where empirical data is insufficient, actuarial assumptions should be conservatively set to account for uncertainty. Calculation methodologies should also be aligned to ensure comparability of actuarial assumptions among insurers.
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Guidelines on Loss Ratio Assumptions
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In estimating the loss ratio for new coverage (with no more than five years of empirical data), loss assumptions shall not be based on analogous coverage. Rather, the applicable loss ratio shall be the higher of (i) a loss ratio assumption incorporating a 10% margin of safety, and (ii) the historical loss ratio of the broader level coverage that encompasses such new coverage.
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In case of renewable insurance policies other than reimbursement-type insurance, to prevent the understatement of insurance liabilities based on excessive assumptions of future premium increases, the target loss ratio shall be set as the higher of (i) a conservative loss ratio assumption (in line with the standard applicable for new coverage) and the empirical loss ratio.
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Timing for the application of the final loss ratio shall be reasonably determined, taking into account actual statistical data by coverage and the calculation units for loss ratios shall be segmented within a range that ensures statistical homogeneity and reliability.
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Guidelines on Operating Expense Assumptions
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Enhancement of Insurers' Internal Controls
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All elements relating to the process of deriving and revising actuarial assumptions—including empirical data used, methods for calculating and adjusting data, the resulting outputs, and records of decision making, shall be fully documented and be validated by the compliance or audit department.
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If actuarial assumptions are revised during a fiscal year, the reasons for, and nature of, the proposed revision, and the resulting financial impact, must be reported to the risk committee.
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Enhancement of the Supervisory Framework
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An “actuarial assumptions report” will be newly introduced, whereby insurers will report annually to the Financial Supervisory Service on the status of their actuarial assumptions, their internal controls, and any changes relating thereto. In addition, specific loss ratios by major coverage shall be added as a disclosure item.
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With respect to the loss ratio and expense assumption guidelines, detailed implementation standards will be issued in the first quarter of this year and will take effect starting from the second-quarter financial closing. The measures for enhancement of internal controls and the supervisory framework will be implemented during the second quarter, through amendments to the relevant regulations.
[Korean Version]
