Korea: Insurers will benefit from guidelines to curb mis-selling by third-party agents - Moody's Investors Service

| 12 Mar 2019

On 5 March, Korea's financial regulator, the Financial Supervisory Service (FSS), announced internal control measures and training guidelines for general agencies (GAs) - third-party insurance agencies that cross-sell multiple insurers' products. Young Kim, Analyst, and Sally Yim, Associate Managing Director, both from Financial Institutions Group, Moody's Investors Service, share their insight.

The measures and guidelines are credit positive for Korean insurers because they will strengthen GAs' internal control procedures and provide agents with standardised training, reducing the risk of mis-selling and enhancing transparency.

Measures to strengthen large GAs' internal controls include requiring those with more than 1,000 agents to establish an independent compliance division and establish a minimum tenure for compliance officers of two years. Also, more stringent criteria to become a compliance officer will be implemented, for example, increasing compliance officers' relevant work experience to 10 years from five.

One of the main required measures GAs will take to improve agents' training is the creation of mandatory group sessions to prevent mis-selling. The mandatory sessions, lasting 12 hours in total, will apply to agents with a track record of mis-selling. The sessions will focus on real mis-selling disputes and criminal cases, as well as consumer protection guidelines. Insurers and GAs will also be required to report any regulatory violations and their agents' training completion rates on a regular basis, using a centralized public database (see Exhibit 1 for the full list of measures).

(Credit: Moody's Investors Service)

If implemented successfully, the measures will not only help reduce the risk of mis-selling by GAs, but also increase the transparency and overall productivity of insurance agents.

GAs are an important and growing channel for the distribution of insurance products in Korea. Since 2013, many previously tied agents have moved to GAs, attracted by high early-on commissions and the flexibility to cross-sell multiple products from both life and nonlife insurers. The number of GAs that employ more than 1,000 agents was 35 in the first half of 2018, up from 24 in 2014. There have been more GA agents than tied agents since 2015, while GAs have become one of the main distribution channels for Korean insurers (see Exhibit 2).

(Credit: Moody's Investors Service)

However, mis-selling and policyholder complaints have increased alongside the growth in GAs, amid insufficient financial disclosure by GA agents and a lack of transparency in their activities. According to the FSS, policies sold by GAs have a surrender rate of more than 30% within two years of their sale, while the number of regulatory violations by GAs increased to 28 cases in 2018 from 15 in 2016. In addition, the completion rate of mandatory training requirements was less than 60% for GA agents in 2018, compared with 75%-78% for tied agents, according to the FSS.

The measures are subject to regulatory and legal amendments and are likely to be rolled out from the second half of 2019 to 2020.

This article is from "Moody’s Credit Outlook", 11 March 2019 issue. 

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