[Monster GA]③ Insurance Agencies Must Be Held Accountable for Mis-selling... Urgent Need for Legal Reform (Comprehensive)

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 Specialized Companies

[Editor's Note] It is no exaggeration to say that South Korea's insurance industry, which ranks sixth in the world in scale, owes much of its growth to the sales efforts of insurance planners. Starting from informal sales among acquaintances, it has grown into corporate insurance agencies (GA) specializing in sales. GAs, which can sell products from all insurance companies, 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 a growth limit through innovation.

[Series]

① Illegal sales by GAs, insurance companies also responsible

② GAs eroding trust in insurance

③ GAs must 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, approximately 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 has intensified the rich-get-richer, poor-get-poorer polarization. While large-scale consolidation is underway to achieve economies of scale and strengthen commission negotiation power with insurers, the proliferation of small GAs has led to insufficient supervision and increased consumer damage concerns.

◆ Proliferation of small firms and reluctance for new entrants = The average number of planners affiliated with small GAs is just over 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, showing a significant difference.

Due to their small size, many are outside the scope of proper management. In the first half of last year, after sending management disclosure notices by registered mail to about 4,500 GAs, more than half?about 2,300?were returned. This indicates that management tasks such as updating or canceling registration details like addresses are practically not being carried out.

On the other hand, the growth of large GAs is remarkable. Not only are they increasing their affiliated planners and expanding their size, but companies like Inka Financial Services, Aplus Asset Advisor, and Rich & Co have also announced plans for initial public offerings (IPOs) this year.

There is also little movement from other financial sectors to newly enter the GA business. Last year, 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 enable the development of various bundled products among affiliates.

Except for Shinhan Financial Group, which is expanding investments in the insurance sector, no financial holding companies are currently pursuing GA establishment. 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 from 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 branches are high, but it is judged that the corresponding profits are not guaranteed."

[Image source=Yonhap News]

◆ Qualified GAs to transition into 'sales-specialized companies'? = GAs can sell products from all insurance companies. Currently, there is no institutional way to prevent planners from selecting and selling products that maximize their commissions. The insurance industry consensus is that legal responsibilities of GAs should increase in proportion to their authority.

Last year, financial authorities mandated management disclosure for GAs. They also strengthened qualification requirements for corporate insurance agency executives and introduced internal control measures such as establishing a continuous 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 guidelines.

Regarding recruitment commissions, an improvement plan has been prepared to limit the commission received by insurance planners in the first year to 1,200%, which is scheduled to be implemented next year. 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 insurance product design and sales should be separated?a "manufacturing and sales separation." GAs should be developed into sales-specialized companies to enhance professionalism and accountability. 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-specialized companies."

The concept of sales-specialized companies first surfaced in 2008 when the Financial Services Commission proposed introducing financial product sales-specialized businesses. At that time, the discussion was halted 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 a company becomes a sales-specialized company, it gains negotiation rights to lower insurance premiums on behalf of consumers against insurance companies but also assumes obligations such as compensation responsibility for incomplete sales. This inevitably increases the burden on small GAs.

Accordingly, the Insurance Agency Association is considering a plan to convert GAs that meet certain qualification criteria into sales-specialized companies. GAs would be evaluated based on factors such as planner retention rates, incomplete sales rates, capital size, and the presence of educational infrastructure to grant qualifications.

For example, scoring would be applied to whether the capital size exceeds 500 million won, whether the 13th and 25th installment policy retention rates exceed the industry average, or whether educational infrastructure is established. If a GA meets a certain threshold, it could be converted into a sales-specialized company.

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