FSS Issues Consumer Alert on Unfair Insurance Replacements... Introduces Comparative Disclosure of Replacement Contract Rates

Complaints About Unfair Replacements Surge 54% in Q1
Warning on Surrender Value Loss and Waiting Period Risks
On-Site Inspections Stepped Up Amid Fierce Competition Over Settlement Support Payments

The financial supervisory authorities have issued a consumer alert to prevent unfair replacement damages that occur during the job transition process of insurance agents. This decision comes amid growing concerns over "unfair replacement," where agents cancel existing insurance policies and switch to new ones, as fierce competition for large settlement support payments among some corporate insurance agencies (GAs) intensifies. The financial authorities plan to strengthen market monitoring by introducing comparative disclosures of replacement contract rates by insurance company, sales channel, and product. In addition, they will significantly toughen institutional sanctions against both insurance companies and GAs for any illegal activities.

On May 12, the Financial Supervisory Service (FSS) announced that it will pursue institutional reforms to prevent unfair replacements. In April, the FSS revised the Enforcement Decree of the Insurance Business Act to require that the comparative guide certificate display the surrender value ratio instead of just the simple surrender refund amount, and to include both the declared interest rate and the scheduled interest rate as comparison items. This is intended to help consumers more intuitively compare the refund levels and interest rate structures of existing and new contracts.

Starting in the second half of this year, the FSS plans to launch comparative disclosures of replacement contract rates by insurance company, sales channel, and product. For life insurance, replacement contract rates will be disclosed for 11 product groups, including whole life, cancer, and illness insurance. For non-life insurance, the rates will be disclosed for 12 product groups, such as cancer, long-term care, and children's insurance, in order to strengthen market surveillance.

The FSS will also step up on-site inspections of insurance companies and GAs with excessive settlement support payment competition and a high number of suspicious replacement contracts. Over the past five years, a total of KRW 7.66 billion in fines has been imposed on 20 insurance companies, and KRW 850 million in penalties on 14 GAs, in connection with unfair replacements. Going forward, the authorities stated they will further toughen institutional sanctions that hold insurance companies and GAs accountable for management oversight, rather than just penalizing individual agents, and will significantly increase the severity of sanctions for intentional violations.

This is due to concerns over consumer damages related to unfair replacements. Previously, in January, the FSS finalized a reform plan for insurance sales commissions to address the excessive operating expenses of insurance sales channels. As a result, beginning in July, the so-called "1200% rule," which limits sales commissions to within 1,200% of the first-year insurance premium, will be applied to GAs as well. However, there have been concerns that some GAs are offering large settlement support payments to secure agents ahead of the institutional reform, in an effort to scale up their operations.

According to the FSS, in the first quarter of this year, there were 211 complaints related to unfair replacements filed with the FSS, a 54% increase compared to the previous quarter (137 cases). The FSS warned that switching insurance policies can result in a variety of disadvantages, including the loss of surrender value, coverage gaps, reapplication of waiting periods, and higher premiums.