The Financial Services Commission. /Courtesy of News1

The financial authorities' momentum for insurance reform is weakening. The authorities were planning to extend the final observation period to 30 years, but they decided to reconsider the timing in light of the insurance industry's concerns that the financial stability of insurers could deteriorate in the short term. The reform plan for insurance agents' commissions has also emerged for further discussion due to resistance from the corporate insurance agency (GA) sector.

According to the insurance industry on the 16th, the financial authorities held the first meeting of the insurance industry stability task force (TF) on the 1st and decided to review the timetable for extending the final observation period to 30 years. Initially planned to be implemented this year, it was changed to a gradual application over two years, but they have decided to rethink the schedule from scratch.

The financial authorities believe that extending the final observation period to 30 years will allow for a fair evaluation of insurers' liabilities. Under the new accounting system (IFRS 17), insurers must present the insurance benefits (liabilities) payable to customers in the present value through market valuation. The market valuation is significantly influenced by discount rates reflecting market interest rates, such as government bond rates. The insurance industry has only considered the 20-year government bond rates for determining discount rates. However, the financial authorities view the 30-year government bonds as having sufficient trading volume and liquidity to represent the market, and they determined that the final observation period should be extended to include 30-year bonds.

On the other hand, insurers argued that extending the final observation period could worsen their financial soundness in the short term. They stated that given the current market conditions, there is a high possibility that extending the final observation period would lead to a decrease in discount rates, which in turn would increase insurers' liability levels. If the liability levels increase, the solvency ratio (KIX) used as a soundness indicator could also decline.

The financial authorities indicated that the timing for implementation would be reconsidered based on their stance that they could adjust the speed of implementation from the time they decided to adopt the system. A financial authority official noted, "The influence at the time of deciding to implement the system and the influence due to the current interest rate situation may differ," and added, "The intent is to discuss whether it is appropriate to proceed according to the originally intended timetable."

An explanation session for the revised commission plan for insurance planners hosted by the financial authorities. /Courtesy of News1

The reform plan for insurance agents' commissions, which was a key part of the insurance reform, is also facing turbulence. The GA sector submitted a proposal to the Presidential Committee on Policy Planning, suggesting that the reform plan should be reconsidered. Even considering this as a feedback period for the insurance supervision regulations, the parties who had previously agreed to the plan have once again raised concerns.

Earlier, the financial authorities had argued that allowing agents to receive all their commissions between 1 to 2 years is problematic and pushed for a plan to distribute the commissions over a maximum of 7 years. When the GA sector protested, the authorities took a step back and decided to initially apply a 4-year distribution plan, which the GA sector also supported.

However, the GA sector argued that the 4-year distribution commission rate is lower than expected, leading to significant income reduction effects, and claimed that the financial authorities are excessively intervening in private autonomy. A GA sector official stated, "While there was an agreement on the direction of commission distribution, there has not been sufficient discussion regarding the 4-year distribution aspect." In response to criticisms regarding their self-negation of the agreement, they said, "It is reasonable to raise concerns at a time when we can officially submit alternatives."

Some voices suggest that the momentum of the financial authorities has diminished due to the new government discussing organizational restructuring. The financial authorities, which were pushing for the transfer of MG Insurance contracts, have decided to reinitiate the sale of MG Insurance amid political mediation reflecting some labor union claims.

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