Financial authorities have proposed the “IFRS 17 Actuarial Assumption Guidelines” to help prevent confusion during the early phase of implementation of the IFRS 17, which was newly introduced in 2023, and to ensure the reliability of financial statements. This is in response to criticism that a number of insurance companies might have used some arbitrary assumptions in calculating their contract service margins under the IFRS 17 accounting. The key details are as follows.

1.   Actuarial Assumptions for Indemnity Medical Insurance
 

• Calculation standards for the trend of insurance proceeds: Each insurance company shall (i) estimate the increase rate of insurance proceeds for the initial period based on its own empirical statistics and (ii) adjust the increase rate of insurance proceeds for the subsequent period (up to the 15th fiscal year) so that the final increase rate of insurance proceeds should approach the increase rate of insurance proceeds used in calculating insurance premiums.

• Calculation standards for renewal premiums: Each insurance company shall (i) estimate the risk loss ratio for the first year based on its own empirical statistics, and (ii) for the subsequent period (up to the 15th fiscal year), reflect the rate for renewal premiums so that the risk loss ratio approaches the target loss ratio (the target loss ratio shall be determined by setting the ratio of gross premium to insurance proceeds to be 100%).
   

2.   Assumptions for Cancellation Rate of No or Low Surrender Value Insurance Products
 

• Calculation standards for surrender rate assumption: The surrender rate of no or low surrender value insurance products shall be set lower than that of standard type insurance products (this shall be consistent with the method applied to calculate insurance premiums), and reflect the pattern where the cancellation rate decreases immediately prior to the payment of premiums and increases immediately after the payment of premiums.
   

3.   Assumptions for Surrender Rate of High-Interest Rate Products
 

• Calculation standards for surrender rate assumption: Assumptions different from other contracts shall be applied when calculating the surrender rate for high-interest rate contracts.
   

4.   Standards for Amortization of Contract Service Margin
 

• For amortization of contract service margin, the insurance contract services shall include not only protection services but also investment services.
   

5.   Standards for Amortization of Risk Adjustment
 

• The basic data used to calculate the ending risk adjustment shall be used in the same manner as in the beginning risk adjustment.
   

These proposed guidelines will be finalized after assessing their impact on insurance companies. Once they are finalized, they can be applied starting from the July 2023 closing. In addition, the financial authorities have stated that they may provide additional guidelines after reviewing other issues related to actuarial assumptions.

[Korean Version]