[The Monster GA]③ An Era of Accountability Proportional to Authority... Separation of Manufacturing and Sales Needed

Polarization Deepens into 'Their Own League' Centered on Medium to Large GA
Among 4,500 Locations, 1,200 Have No Performance for 6 Months
Urgent Legal Measures Needed to Establish Sales-Only Companies

[Editor's Note] It is no exaggeration to say that South Korea's insurance industry, which ranks nearly sixth in the world, originated from the sales efforts of insurance planners. Starting from informal sales through acquaintances, it has grown into corporate insurance agencies (GA) specializing in sales. GAs, which can sell all insurance companies' products, have experienced remarkable quantitative growth but have also faced criticism as unhealthy sales actors aiming for commissions. Asia Economy analyzes the problems of GAs and seeks solutions for the insurance market, which has reached growth limits through innovation.

[Series]

① Illegal sales by GAs, insurance companies also responsible

② GAs eroding trust in insurance

③ GAs need to enhance sales expertise

[Asia Economy Reporter Oh Hyung-gil] According to the Financial Supervisory Service's sales inspection of corporate insurance agencies (GAs) last year, among about 4,500 GAs excluding those affiliated with financial institutions, about 1,200 had no sales performance in the past six months. Most of these are small GAs with fewer than 100 affiliated planners, falling behind the well-established networks of medium and large GAs.

Commissions received by GAs from insurance companies reached nearly 6 trillion won last year alone. However, the "their own league" centered on medium and large GAs is deepening the polarization between the rich and the poor. While large-scale consolidation is underway to achieve economies of scale and increase bargaining power with insurance companies over commissions, the unchecked proliferation of small GAs raises consumer damage concerns more than ever.

◆ Proliferation of small firms and reluctance for new entries = The average number of planners affiliated with small GAs is just about 10. As of September last year, there were 4,290 small GAs with fewer than 100 planners, but the total number of planners was 43,198. This means an average of 10 planners per GA. In contrast, large GAs have an average of 2,773 planners, and medium GAs have 223 planners, showing a significant difference.

Due to their small size, many are outside the scope of management. When management disclosure notices were sent by registered mail to about 4,500 GAs in the first half of last year, more than half, about 2,300, were returned. This indicates that management tasks such as changing or deleting registration details like addresses are practically not being performed.

There is also little movement to newly enter the GA business. Last year, the financial authorities revised the Financial Holding Company Supervision Regulations to allow bank financial holding companies to establish insurance agencies as subsidiaries. They also simplified information-sharing procedures to develop various combined products among affiliates.

Except for Shinhan Financial Group, which is expanding investments in the insurance sector, no financial holding company is currently pushing to establish a GA. Shinhan Financial Holding has been considering establishing a subsidiary-type GA for several years in line with its acquisition of Orange Life.

A Shinhan Life official explained, "We are reviewing the establishment of a subsidiary-type GA at the working level following the revision of supervisory regulations," but added, "The specific timing of establishment has not yet been decided."

A representative of an insurance company affiliated with another financial holding company said, "We expect the sales market to continue growing, but the problem is profitability," adding, "Initial investment costs such as securing planners and opening stores are high, but we judge that the corresponding profits are not guaranteed."

[Image source=Yonhap News]

◆ Qualified GAs to transform into 'sales specialist companies'? = GAs can sell products from all insurance companies. In reality, there is no institutional way to prevent planners from choosing and selling products that maximize their commissions in advance. The insurance industry consensus is that legal responsibility of GAs should increase in proportion to their authority.

Last year, the financial authorities mandated management disclosure for GAs. They also strengthened qualification requirements for corporate insurance agency executives and introduced measures to enhance internal controls, such as establishing a permanent monitoring system for unhealthy sales practices in large GAs. In the first half of last year, 99.8% of GAs with sales performance complied with management disclosure, and last month, the Insurance Agency Association established and implemented standard internal control criteria.

Regarding recruitment commissions, improvement plans such as limiting the commission received by insurance planners in the first year to 1,200% have been prepared and are scheduled to be implemented from next year. The authorities expect the practice of "arbitrage transactions," where policies are canceled after the 13th premium payment, to decrease.

However, voices in the market suggest that in the mid to long term, the "separation of manufacturing and sales" of insurance products should be pursued. GAs should be developed into sales specialist companies to grant expertise and responsibility. Professor Lee Soon-jae of Sejong University's Department of Business Administration said, "Separation of manufacturing and sales is an inevitable global trend," and argued, "Legal measures should be prepared to establish insurance sales specialist companies."

The concept of sales specialist companies first surfaced in 2008 when the Financial Services Commission proposed introducing financial product sales specialist businesses. At that time, the discussion was suspended due to the insufficient preparation of fledgling insurance agencies, and the related amendment to the Insurance Business Act was discarded in the 18th National Assembly.

If becoming a sales specialist company, the company would gain negotiation rights to lower insurance premiums on behalf of consumers against insurance companies but would also bear obligations such as compensation responsibility for incomplete sales. This would inevitably increase the burden on small GAs. Accordingly, the Insurance Agency Association is considering a plan to convert GAs that meet certain qualification requirements into sales specialist companies. The plan involves evaluating GAs based on factors such as planner retention rates, incomplete sales rates, capital size, and presence of educational infrastructure to grant qualifications.

Lee Jae-woon, Executive Director of the Insurance Agency Association, said, "Mandatory conversion to sales specialist companies could cause confusion in the insurance market," but added, "We plan to promote a measure allowing large GAs to convert into sales specialist companies if they meet qualification requirements."