[Financial Microscope] Internal Control Trio Rolled Out, But Commission Reform Delayed... 'GA Reform' in Doubt

Three-Pronged Internal Control Measures Introduced,
But Momentum Weakens as Commission Reform Is Delayed
Complaints of "Unfairness" and "Increased Regulation" Emerge

Financial regulatory authorities have introduced a set of three internal control measures related to the appointment of insurance agents and the risk of incomplete sales, aiming to reduce improper policy replacements (so-called "churning") by insurance agents affiliated with corporate insurance agencies (GAs). However, questions are being raised about the effectiveness of these measures, as the key reform of changing the agent commission structure has been postponed due to opposition from GAs.

Strengthening Risk Management..."Insurance Companies Must Also Be Held Accountable for GA Incidents"

Yeouido Financial Supervisory Service Headquarters, Yeongdeungpo-gu, Seoul. Financial Supervisory Service

According to the Financial Supervisory Service (FSS), life and non-life insurance associations, and the GA Association on May 7, the FSS sent "appointment guidelines" outlining the procedures for appointing agents to the three associations at the end of last month. Since the beginning of this month, the three associations have been distributing these appointment guidelines to their member companies. The purpose is to prevent the practice of agents with a history of misconduct moving from one company to another within the industry. Under current law, even agents who have served a prison sentence for insurance fraud can be rehired after three years. According to the FSS's survey released at the end of March on the status of agent appointment controls at 105 insurance companies and GAs, 73 companies (69.5%) had appointed agents with a disciplinary record. The FSS concluded that such appointment practices have become a breeding ground for improper policy replacements.

At the end of next month, the FSS plans to introduce "insurance company third-party risk management guidelines." These guidelines will require insurance companies to manage the incomplete sales rate, number of complaints, and disciplinary history of GAs. If insurance companies fail to do so, they will also be held accountable.

In the second half of the year, a "GA operational risk assessment system" will be newly introduced. This was announced at the 6th Insurance Reform Meeting held by the Financial Services Commission at the end of January. Under this risk assessment system, insurance companies will evaluate the contract retention rate, incomplete sales rate, and commission policies of GAs to which they outsource product sales, and assign them a grade from 1 to 5. Companies with lower grades will be required to set aside additional required capital under the risk-based capital ratio (K-ICS) system.

In summary, the authorities are introducing a set of three internal control measures that apply not only to GAs but also to insurance companies.

Commission Reform Stalled... Doubts About Synergy with Internal Control Reforms

The industry is already questioning the effectiveness of the internal control reforms before they have even been fully implemented. This is because another key aspect of reforming agent recruitment practices?the overhaul of sales commissions?has stalled. On April 30, the FSS held a "second briefing on insurance sales commission reform" at the Korea Deposit Insurance Corporation in Jung-gu, Seoul, and announced that the implementation of the plan to pay commissions over seven years would be postponed until 2029. This is a delay of one year and six months from the original plan.

Until now, sales commissions have been concentrated in the first one to two years after a policy is signed. This structure has been criticized for encouraging agents to focus only on short-term results and neglect contract retention, thereby fueling improper policy replacements. There have also been cases where agents, in an effort to boost their performance, have aggressively pushed policyholders to switch policies, sometimes colluding with hospitals or brokers, or even acting as brokers themselves in organized fraud schemes. For this reason, the FSS had planned to reduce improper policy replacements by requiring commissions to be paid over a longer period, but postponed this measure in the face of strong opposition from GAs. As a result, the authorities' intended "dual-track" strategy of internal control and commission reform has lost momentum.

An FSS official, when asked about the weakening momentum for commission reform due to GA opposition, said, "It is necessary to take a medium- to long-term view until the process of long-term commission payments is established," declining to comment further.

Increased Regulation Brings 'Burden'... Effectiveness in Doubt

The GA industry has pushed back, arguing that GA-affiliated agents do not engage in incomplete sales more than exclusive agents at insurance companies, yet they are subject to excessively strong regulation. A GA industry representative said, "The two-year contract retention rates for exclusive agents and GA agents are at similar levels, but only GAs are subject to excessive regulation," adding, "Having insurance companies directly manage GAs is an excessive infringement on private business operations." In fact, according to the FSS's announcement on April 22 regarding last year's two-year contract retention rates by sales channel, GA agents had a retention rate of 70.8%, while exclusive agents at insurance companies had a rate of 68.7%.

Life and non-life insurers have also expressed concern that the entire insurance industry is being burdened due to the misconduct of some GA-affiliated agents. A non-life insurance industry representative said, "If the internal control obligations for GA-affiliated agents are applied to the entire industry, it will only increase regulation while having limited impact in terms of disciplinary effects." A life insurance industry representative commented, "From the perspective of primary insurers, it is impossible to ignore the contribution of GA-affiliated agents to sales. It is the responsibility of the supervisory authorities, and designing a system that shifts this responsibility to primary insurers is not appropriate."

Another industry official pointed out, "If internal controls are strengthened without commission reform, the core goals of improving contract retention rates and reducing incomplete sales?the essence of reform?are unlikely to be achieved, so the effectiveness will be limited."