[Financial Microscope] Reform of 'Insurance Sales Commissions'... What Was the Issue?

Transparent Disclosure of Sales Commissions to Address Information Asymmetry
Commissions to Be Paid in Installments for Up to 7 Years... Improving Retention Rates and Stabilizing Agent Income
System to Be Institutionalized After Supervisory Regulation Revision in May

The financial authorities have finalized a draft for the revision of insurance sales commissions. Since the commissions that corporate insurance agencies (GA) receive from insurance companies for selling insurance products on their behalf have been linked to incomplete sales and excessive competition, measures have been prepared to prevent these issues. Given the significant impact this revision will have on nearly 300,000 GA agents, considerable repercussions are expected going forward.

Transparent Disclosure of Sales Commissions... Preventing Recommendations Focused on High-Commission Products

On the 31st of last month, the Financial Services Commission held a briefing session with about 200 representatives from the insurance and GA industries to unveil the 'Insurance Sales Commission Revision Plan.' This was the first public briefing since the 5th Insurance Reform Meeting held last December, where the direction for commission revision was discussed. The session was organized to gather industry opinions before starting the revision of supervisory regulations for the system's implementation in May.

The key revision promoted by the financial authorities is the disclosure of sales commission information. Exclusive agents affiliated with insurance companies sell only their own products, but GAs can compare and sell products from multiple insurers, offering consumers a wider range of choices. However, some GA agents have often recommended products based on high commissions rather than consumer needs. To address this, the authorities plan to ensure that when GA agents recommend insurance products, the commission rate information for those products is reflected in the commission information sheet provided to consumers. Detailed commission rate information by sales channel and product category will also be publicly disclosed.

Commission disclosure is already implemented overseas in regions such as the European Union (EU), the United States, and Australia. The EU's Insurance Distribution Directive (IDD) stipulates that insurance distributors must inform policyholders of the costs and commissions arising from insurance contracts before concluding the contract. Australia’s regulatory guide by the Australian Securities and Investments Commission (ASIC) requires disclosure of all benefits and conflicts of interest related to commissions received by sales personnel in product disclosure statements. In New York State, USA, insurance product sellers are required to disclose the sales commissions they receive from insurers.

Commission information is already disclosed in other domestic financial sectors. Major refinancing loan platforms such as Toss, Naver Pay, and Kakao Pay disclose average, minimum, and maximum brokerage commission rates by loan product and financial company. Card companies disclose preferential commission rates by sales volume for small and medium-sized merchants as well as the average merchant commission rate in the card industry. Financial investment firms also disclose fees and front-end/back-end sales commissions for each fund on their websites and the Korea Financial Investment Association. No Young-hoo, Director of the Insurance Supervision Bureau at the Financial Supervisory Service, explained, "The GA industry compares commission disclosure to corporate cost disclosure, but that is not the case," adding, "Commission disclosure is already practiced by overseas insurance regulators and other domestic financial sectors."

Commissions Previously Paid Mostly in 1-2 Years Will Be Paid in Installments Over Up to 7 Years

The authorities are also promoting a plan to pay sales commissions in installments over 3 to 7 years. Until now, commissions were paid to GAs within 1 to 2 years of the insurance contract. The authorities believe this practice reduces the incentive for GA agents to manage and maintain customers' insurance contracts over the long term and leads to unfair switching (insurance churning).

According to Financial Supervisory Service statistics, the retention rate for life insurance contracts was 85.65% in the first year but sharply dropped to 61.75% in the second year as of last year. During the same period, non-life insurance contracts declined from 72.57% to 67.01%. Han Sang-yong, head of the Insurance and Pension Research Office at the Korea Institute of Finance, said, "There are many 'bird-flocking' agents who repeatedly move to other GAs after receiving commissions," adding, "A commission system that encourages efficient contract retention and management needs to be established."

The authorities have devised a plan to introduce maintenance and management commissions within sales commissions, paid monthly in installments for up to 7 years. Based on simulations of commission income, the authorities found that agents would receive 1150% in the first year of the contract, 400% in the second year, and 150% annually from the third to seventh years, resulting in a cumulative income of 2300%. Currently, agents receive 1150% in the first year and 850% in the second year, totaling 2000%. This structure increases income the longer agents maintain customer contracts. Ko Young-ho, head of the Insurance Division at the Financial Services Commission, stated, "While some agents may experience a short-term decrease in income due to the commission revision, stable income can be secured in the long term," adding, "We also plan to discuss smooth transition measures to prevent sudden income drops caused by the commission revision."