[Monster GA] ① Insurance Companies Also Liable for Incomplete Sales by Corporate Agencies (Comprehensive)

Financial Authorities "Action if Prior Knowledge Involved"
GA Arbitrage Exploits Insurance Commission Standard Loopholes
Dominating Sales Market... Taking Measures Against Market Disorder

[Editor's Note] It is no exaggeration to say that South Korea's insurance industry, which ranks sixth in the world in scale, 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 undermining insurance trust

③ GAs need to enhance sales expertise

[Asia Economy Reporter Oh Hyung-gil] To prevent incomplete sales by insurance corporate agencies (GAs), which have rapidly emerged as major sales channels in the insurance market due to their growing influence, financial supervisory authorities are introducing measures to hold the insurance companies that outsource sales responsible as well.

This means assigning management and responsibility to insurance companies during the process of concluding sales contracts with GAs. This measure comes as side effects have been occurring due to GAs growing large enough to affect insurance companies' market shares and the increasing dependence of insurance companies on GAs.

◆ GA has become a giant... also controls market share = According to financial authorities and the insurance industry on the 10th, the Financial Supervisory Service (FSS) is reviewing plans to establish GA management and supervision measures for the insurance companies that outsource sales. The financial authorities believe that if insurance companies are aware of or tacitly allow incomplete sales by GAs, action is necessary.

An official from the authorities said, "This is based on the judgment that sales contracts between insurance companies and GAs may leave room for incomplete sales," adding, "We plan to strengthen internal controls within GAs and induce insurance companies to take responsibility for GAs' incomplete sales to enhance management."

The reason financial authorities are strengthening sanctions is that the GA channel's dominance in the insurance market has grown at a frightening pace. According to the FSS, as of the end of September last year, there were 596,310 insurance planners in South Korea. Among them, 408,826 planners belong to GAs, accounting for 68%. Since the number of planners in the offline insurance sales market directly correlates with competitiveness, this means that 7 out of 10 insurance planners belong to GAs. Although the number of GAs has remained around 5,700 over the past three years, the number of affiliated planners continues to increase steadily.

In particular, some large GAs have expanded quantitatively to the extent that their number of affiliated planners approaches 10,000, surpassing the scale of insurance companies. Recently, new sales organizations such as one-person GAs, which transact directly with insurance companies, have also emerged.

Having achieved economies of scale, GAs exert absolute influence over insurance sales. The number of new contracts concluded by medium to large GAs with more than 100 affiliated planners was 13.18 million in 2018, a 28.5% increase from 10.25 million the previous year. Commission income from insurance sales also exceeded 6 trillion won in 2018.

Accordingly, if GAs concentrate sales on products from a specific company, they can even change the rankings within the insurance industry. In fact, it is an open secret that some insurance companies pay excessive commissions to GAs to boost sales of their own products. The money GAs have earned from winning insurance contracts amounts to trillions of won. In 2018, about 180 medium to large GAs with more than 100 affiliated planners earned a total of 7 trillion won solely from insurance sales commissions.

◆ Authorities draw the sword... insurance companies also responsible when market order is disrupted = According to an investigation by the FSS, there have been frequent cases of GAs exploiting loopholes in the commission and incentive payment standards between insurance companies and GAs. Insurance companies have operated excessive recruitment commission standards for GAs to achieve sales performance, which has effectively created an environment where GAs can engage in unhealthy sales practices such as false contracts and commission payments to unqualified individuals, aiming for these commissions.

Arbitrage refers to the situation where the commission or incentive received by a planner from an insurance company exceeds the insurance premium or refund fees payable to the insurance company, resulting in a profit margin.

Exploiting these gaps, cases of incomplete sales where GAs cancel contracts after recruitment have recently been repeatedly detected. Last month, the FSS identified inadequate management of commission payment standards for insurance recruitment at Meritz Fire & Marine Insurance, Mirae Asset Life Insurance, and Shinhan Life Insurance, and issued improvement orders.

The financial authorities analyzed whether arbitrage occurred in thousands of contracts concluded through GAs by Meritz Fire & Marine Insurance from 2016 to 2018 that were canceled between the 8th and 16th premium payments. The results showed that arbitrage contracts accounted for 42.6% of all canceled contracts. Especially, for contracts concluded between January and September 2018, arbitrage occurred in 59.4% of contracts canceled within a certain period.

In the case of product A, it was confirmed that GAs who canceled contracts after paying 12 premiums earned an arbitrage profit of 426%, which is the difference between the recruitment commission (1626%) and the paid premiums (1200%), excluding the surrender value. Excessive commissions meant that the commissions received exceeded the premiums paid to the insurance company.

Mirae Asset Life Insurance also recruited 1,748 insurance contracts through some GAs from 2016 to last year, of which 199 were canceled between the 3rd and 19th premium payments. This was a typical behavior aimed at arbitrage. The B insurance product sold by Mirae Asset Life Insurance paid contract-proportional commissions of 1200% (distributed up to the 36th payment), performance-proportional commissions of 900% (paid initially), and incentives of 100% (paid initially) compared to the first premium.

Additionally, Shinhan Life Insurance set commissions and incentives for variable whole life insurance products as high as 2200%. When canceling after 12 premium payments, the difference between premium income (1200%) and the paid commission considering refunds (1402%) was 202%.

Insurance companies have operated excessive recruitment commission standards for GAs to achieve sales performance, effectively creating an environment where GAs can engage in unhealthy sales practices such as false contracts and commission payments to unqualified individuals, aiming for these commissions.

Accordingly, the Financial Services Commission prepared the 'Insurance Business Expenses and Commission Reform Plan' last year, which limits first-year planner commissions to 1200% of the monthly premium, scheduled to be implemented from 2021.

Large GAs that have used commissions for operating expenses are expected to face significant management impacts, but concerns have also been raised that distorted organizations such as 'branch-type GAs' formed by alliances of individual agencies or 'one-person GAs' may balloon like a balloon.

An insurance industry official said, "It is practically impossible to conduct full inspections or uniform management of the approximately 30,000 insurance agencies," adding, "Along with institutional improvements, insurance companies and GAs need to establish ways to strengthen their own management."

This content was produced with the assistance of AI translation services.