Introduction of 'Risk Assessment System' to Curb Incomplete Sales by GAs
Sharing Five Key GA Management Checklist Items
Control of Problematic Planners to Be Reflected in Evaluation
After completing the revision of commission rules for corporate insurance agencies (GAs), the financial supervisory authorities will proceed as planned with the implementation of an 'internal control three-piece set' to reduce improper contract replacements (insurance switching) and incomplete sales by insurance planners affiliated with GAs. The authorities will impose the obligation to manage planners not only on GAs but also on insurance companies. If insurance companies fail to properly manage incomplete sales by planners, they will face penalties such as additional capital requirements (K-ICS, KICS) costs.
On June 3, the Financial Supervisory Service (FSS) announced these measures in its 'Efforts to Establish Sound Insurance Sales Practices and Future Plans.' The FSS diagnosed that unhealthy business practices persist due to excessive advance commission payments and weak internal controls within GAs. The FSS pointed out that illegal activities such as incomplete sales or improper contract replacements resulting from briefing sales or 'last chance marketing' are causing consumer harm.
The FSS explained that it has been working on the 'Third-Party Risk Management Guideline' and the introduction of a GA operational risk assessment system, both of which outline insurance companies' obligations to manage GAs. These efforts are aimed at strengthening insurance companies' oversight of GA sales delegation. On June 1, together with the Financial Services Commission, the FSS finalized and announced a revised commission payment plan, which requires commissions to be paid in installments for up to seven years and extends the so-called '1200% rule' to GAs. The 1200% rule stipulates that first-year commissions cannot exceed 1200% of the monthly insurance premium.
The FSS stated that it will first share the 'five key checklist items' from the Third-Party Risk Management Guideline with insurance companies to incorporate them into internal controls. The five items include: checking sanction histories, establishing and operating appropriate criteria for appointing planners, assessing the level of branch control, evaluating the ability to manage sensitive information, and identifying poor sales soundness indicators. This means that if insurance companies neglect to manage GA incomplete sales rates, the number of complaints, or sanction histories, they will be held responsible.
The FSS also announced that, as stated at the sixth Insurance Reform Meeting held at the end of January, it is pushing forward with the establishment of a GA operational risk assessment system. The FSS is currently developing quantitative and qualitative assessment indicators and gathering feedback from the insurance industry. Insurance companies will be evaluated on the contract retention rates of their delegated GAs, incomplete sales rates, and commission policies, and then graded from 1 to 5. Incentives will be given to excellent and good insurance companies, while those rated as inadequate will face penalties such as additional KICS capital requirements.
The FSS has distributed 'Best Practice' guidelines for the appointment and dismissal of insurance planners to insurance companies through the Life and Non-Life Insurance and GA Associations. Going forward, the FSS will check whether insurance companies reflect these appointment and dismissal management rules in their internal controls and will incorporate this into insurance company operational risk assessments and GA internal control operation evaluations. The aim is to prevent planners with problematic records from repeatedly moving within the industry and engaging in improper contract replacements and incomplete sales.
Under current law, even planners who have been sentenced to imprisonment or higher for insurance fraud can be rehired after just three years. According to the FSS's survey on the appointment control status of planners at 105 insurance companies and GAs, released at the end of March, 73 companies (69.5%) had appointed planners with sanction histories. The FSS determined that this appointment practice has contributed to improper contract replacements.
The FSS plans to make it mandatory for large GAs with more than 500 planners to establish and operate internal controls and to guide the establishment of branch management systems at headquarters. The FSS will also publicly disclose the annual ratings from the GA internal control operation evaluations. In addition, the FSS will improve sanction standards so that GA sanctions are commensurate with the level of illegality. Currently, sanction standards are set as a percentage of premium income, which means that as GAs grow larger, the level of sanctions decreases.
The FSS emphasized that it has recently uncovered cases of incomplete sales by planners affiliated with GAs, including unauthorized fundraising, executive term insurance, and short-term whole life insurance, and plans to further enhance its inspection system. Since last year, the FSS has implemented regular inspections for super-large GAs with more than 3,000 planners, inspecting a total of six organizations (three last year and three scheduled for this year). The FSS also plans to institutionalize joint and simultaneous inspections of insurance company subsidiaries and large GAs.
An FSS official stated, "We will take the necessary steps to ensure that the ongoing system improvements are implemented as soon as possible and will closely monitor whether the insurance industry faithfully complies with them. We will respond strictly and with zero tolerance to cases that undermine the order of insurance sales or cause consumer harm."
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