The Financial Services Commission said on the 20th that it will implement the "advanced actuarial oversight plan for the insurance sector" starting in the second quarter this year. The guideline was prepared to fix concerns that insurers have been applying overly optimistic actuarial assumptions to defer current losses into the future.
Going forward, insurers must use loss ratio assumptions to forecast cash inflows and outflows related to premiums and claims, measure them at present value, and reflect them in insurance liabilities. A loss ratio assumption refers to the expected trend of the ratio of claims to premiums by coverage, based on the elapsed period.
When assuming loss ratios for new coverage, insurers will not be allowed to apply similar coverage by proxy. They must apply the higher of a conservative 90% loss ratio—derived by adding about a 10% safety loading to the reference premium rate used for premium calculation—and the actual loss ratio of the higher-level coverage that includes the new coverage. For non-indemnity insurance, the target loss ratio must be set at the higher of the conservative loss ratio or the actual loss ratio, the same standard as for new coverage. However, for indemnity health insurance, the existing guideline that sets the target loss ratio at 100%, taking into account premium adjustment limits and other rules, will remain in place.
The timing for applying the ultimate loss ratio will also be adjusted. From now on, the timing will be determined by coverage, taking into account actual statistics, and intentionally downplaying adverse movements in observed loss ratios will be prohibited. The unit of loss ratio calculation will also be broken down. If statistical sufficiency and significance requirements are met, the calculation units must be subdivided, with those requirements set and managed by each insurer. In addition, each year, when deriving actuarial assumptions, insurers must conduct a post-review of whether the existing calculation units are appropriate.
Going forward, when deriving expense assumptions, insurers must reflect inflation. As a rule, they must reflect an inflation rate that considers the Bank of Korea's price stability target; exceptions will be allowed only when there is documented, reasonable justification, such as when inflation is already reflected in future premium projections. For common expenses, exceptions will be allowed only when the insurer proves and documents reasonable grounds for shortening the period during which expenses arise, such as personnel costs for a new business strategy team within the strategy division.
Insurers must also mandate documentation of all matters related to actuarial assumptions. When deriving or changing actuarial assumptions, the compliance or audit department must verify conformity with the documented matters, and if actuarial assumptions are changed during the year, insurers will be required to report the reasons for the change and the financial impact to the risk management committee.
Every year, insurers must file regular reports with the Financial Supervisory Service on the status of actuarial assumptions, internal controls, change history, and more. They must also additionally disclose loss ratio assumptions by major coverage.
Detailed working standards for the loss ratio and expense guidelines are scheduled to apply from the end of the second quarter's settlement of account this year. Measures to strengthen internal controls and refine the supervisory framework will also take effect in the second quarter.