Starting in the second half of this year, the Financial Supervisory Service will focus on whether insurers set actuarial assumptions—processes that calculate and determine items such as premiums and policy reserves using statistical and mathematical methods—too optimistically when conducting inspections. The financial authorities last month announced guidelines with improvements to actuarial oversight to prevent insurers from inflating earnings; this is a follow-up measure. There are also plans to supplement the guidelines by reflecting findings uncovered after inspections.
On the 19th, according to the financial authorities, the Financial Supervisory Service (FSS) will focus on whether insurers carried out actuarial work based on optimistic outlooks to inflate results. It is expected to mainly check assumptions related to loss ratios and expense ratios of insurance products. The loss ratio is the ratio of claims paid to premiums, and the expense ratio is the share spent on operations such as commissions and advertising. Both the loss ratio and the expense ratio are key factors that determine insurance profit and loss in the actuarial process.
Under the new International Financial Reporting Standard (IFRS 17) announced in 2023, insurers have evaluated insurance liabilities at each quarterly settlement of account date based on metrics such as the loss ratio and directly estimated future profit and loss. However, during the estimation process, assumptions have varied by company, and there have been criticisms that optimistic actuarial processes are set to inflate results. If optimistic actuarial assumptions persist, risk will ultimately be deferred, raising concerns that insurers' soundness will deteriorate in the future.
In response, the financial authorities last month announced the "advanced plan for actuarial oversight in the insurance sector" guidelines. The principles state that when sufficient experience data have been accumulated, insurers must estimate future profit and loss based on them, and when experience data have not been accumulated, they must estimate conservatively in light of uncertainty. The guidelines also require insurers to document the entire process of deriving actuarial assumptions—such as experience data, methods for deriving assumptions, and statistical calibration methods—and to regularly disclose key items to the public.
The guidelines will apply starting with the settlement of account at the end of the second quarter this year. After that, the Financial Supervisory Service (FSS) will, through routine inspections in the second half, check whether insurers are complying with the guidelines and will supplement the guidelines based on issues identified during the inspection process.
An FSS official said, "We are discussing proceeding with inspections of the actuarial process through consultations between the Actuarial Risk Supervision Department and Insurance Inspection Departments 1 and 2."