Reforming Insurance Sales: A new Era of Transparency

In a move aimed at bolstering consumer confidence and stabilizing the insurance market, financial regulators are set to implement sweeping changes to the way insurance products are sold. These reforms, slated for finalization after further discussion in April, focus on increased transparency regarding designer’s fees and a restructuring of commission payouts.

Addressing the “Seung-Hwan” Issue and Early Commission focus

Currently, the insurance industry’s commission structure heavily favors initial sales, leading to concerns about aggressive sales tactics and a lack of long-term customer service. This practice, sometimes referred to as “unfair Seung-Hwan,” involves agents pushing new policies at the expense of existing ones, ultimately harming consumers. The Financial Services Commission (FSC) notes that the intense competition for new contracts, fueled by the implementation of IFRS17, has exacerbated this trend, with most commissions being paid out within the first two years of a policy.

To combat this, authorities are proposing a system where designer’s fees are disclosed to consumers, and commissions are spread out over a longer period, possibly up to seven years. This aims to incentivize agents to prioritize customer retention and long-term policy management over simply chasing new sales.

Extending the 1200% Rule and Enhancing Consumer Trust

The reforms also include extending the “1200% rule” to General Agencies (GAs),limiting sales fees to a maximum of 12 times the monthly premium. This rule, already in place for insurance companies, seeks to prevent excessive upfront commissions that can incentivize aggressive sales practices.

This initiative is crucial, considering the current low levels of trust in insurance sellers. According to the Insurance Research Institute, only 44% of Korean consumers trust insurance product sellers, a figure substantially lower than in countries like singapore, taiwan, the United Kingdom, and France. Malaysia, for example, boasts an 86% trust level.

Impact on Contract Retention Rates

Financial authorities anticipate that these changes will lead to improved contract retention rates. Currently, domestic life insurance and long-term non-life insurance 25-car retention rates stand at 63.2% and 72.4%, respectively. These figures are significantly lower – by 15-35 percentage points – than those of major developed countries, indicating a need for improvement.

Industry Concerns and the Path Forward

While the reforms are intended to benefit consumers, some designers and GAs have expressed concerns. They argue that disclosing sales fees could lead to consumers demanding excessive rebates, potentially destabilizing the industry.

The financial authorities plan to address these concerns through ongoing discussions within a Workers’ Task Force (TF), taking into account feedback from the initial briefing session. A final decision on the reorganization of sales fees is expected after an additional briefing session in april.

International Standards and the Need for Transparency

The move towards greater transparency aligns with international standards. As the financial authorities stated, The international Insurance Supervisory Council (IAIS), which is an international standard, states that it is indeed necessary to disclose the conservative structure due to the possibility of conflict, and major countries have a supervisory system corresponding to the principle. This highlights the global trend towards increased transparency in the insurance sector.