Financial Services Commission Improves Insurance Executives' Performance and Compensation Systems... Recovers Bonuses in Case of Accidents

[Asia Economy Reporter Kwangho Lee] Financial authorities are taking steps to improve the management practices of insurance companies that focus on short-term performance. They are discussing plans to expand the proportion of performance-based and stock-based compensation so that executive rewards are linked to enhancing long-term corporate value and consumer protection.

On the 30th, the Financial Services Commission announced that it held a meeting of the "Insurance Companies' Short-term Performance Improvement Task Force (TF)" together with the Financial Supervisory Service, the Korea Insurance Research Institute, private experts, and the insurance industry to discuss these institutional improvement directions.

The short-term performance orientation of insurance companies manifests as problems in various areas of the insurance industry, such as product development aimed at short-term market share expansion, incomplete sales during insurance solicitation, and short-term, high-risk asset management.

At the meeting, Dr. Sangyong Han of the Korea Insurance Research Institute, who presented on the "Current Domestic and Overseas Status of Executive Performance Compensation and Disclosure Systems in Insurance Companies," pointed out that the proportion of fixed salary unrelated to performance in total executive compensation is high, while the proportion of effectively deferred compensation is low.

In Korea, the fixed salary accounts for 64.2% of total executive compensation, whereas in the United States and the United Kingdom, it is only 16% and 47.6%, respectively. In Korea, cash compensation accounts for 54.6% of executive performance pay, and stock or stock-linked compensation is also relatively low at 45.3%. In the United States, the use of stock in executive performance pay reaches 68%.

Dr. Han also noted that the methods of executive performance evaluation and compensation systems are not disclosed in detail in annual reports, resulting in insufficient monitoring and checks by stakeholders such as shareholders. Insurance companies disclose the total compensation of executives receiving more than 500 million KRW in business reports according to the Capital Markets Act, but do not disclose specific calculation methods and criteria.

The meeting also mentioned institutional improvement measures to ensure that executive compensation is paid in connection with enhancing long-term corporate value, such as increasing the proportion of performance-based pay and stock-based compensation beyond cash.

Private experts attending the meeting agreed on the need to improve the executive compensation system of insurance companies and expected that improving the industry's excessive "short-term profit pursuit" would also resolve chronic and structural problems in product development, insurance solicitation, and asset management.

It was suggested that the executive compensation system is a key element of corporate governance and can be used as an effective control tool for long-term corporate performance and risk management. In the United States, there were criticisms during the 2008 financial crisis that executive compensation systems focused excessively on short-term performance and triggered excessive risk-taking, highlighting the need to strengthen deferred payment and long-term holding requirements for top executives.

There was also an opinion that excessive pursuit of short-term performance can lead to neglect of internal controls in financial companies, which may result in deteriorating soundness and consumer disputes. Therefore, when calculating executive performance pay, it is necessary to more broadly reflect indicators such as customer interests, compliance management, and customer satisfaction.

The Financial Services Commission plans to operate a working group composed of the Financial Supervisory Service, the Insurance Association, research institutes, and the insurance industry starting with this meeting.

A Financial Services Commission official said, "The working group will faithfully collect opinions from the insurance industry and analyze domestic and international cases in detail. Through the TF, we plan to prepare improvement measures for executive performance evaluation, compensation systems, and disclosure standards within this year," adding, "We expect that improving the insurance industry's excessive short-term profit pursuit will also resolve chronic and structural problems in product development, insurance solicitation, and asset management."

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