The Financial Supervisory Service has decided to continuously monitor the allocation and expenditure of business expenses to prevent excessive spending by insurance companies. Concerns have been raised that intense competition among insurers could lead to excessive expenditures on operating costs, resulting in increased premiums. Most of the business expenses for insurance companies are attributed to sales commissions paid to agents.
According to financial authorities on the 9th, the FSS will include the profit and loss of business expenses in the monthly reports submitted by insurance companies. The profit and loss refers to the difference between revenue and expenses and serves as an indicator for cash flow monitoring. Reporting on the profit and loss of business expenses means that the insurance company will check how much of the designated business expense has been spent.
The FSS plans to establish a system for continuous monitoring of business expenses through this initiative. This amendment will take effect from the end of the business report last December.
Recently, due to aggressive competition among insurance companies, the incentives paid to agents have increased, resulting in a sharp rise in business expenses. Business expenses are primarily composed of sales commissions paid to agents. Additionally, costs for new contracts, insurance policy maintenance, and marketing expenses are also included.
The Insurance Business Supervision Regulations stipulate that insurance companies must establish criteria for paying commissions within the business expense limits set in their foundational documents. However, due to ambiguous standards, it is common for insurance companies to use multiple times the amounts specified in these foundational documents.
In particular, with the introduction of the new accounting system (IFRS 17) in 2023, the demand for signing new contracts has increased, causing a Surge in business expenditures among insurance companies. The 22 life insurance companies in the country used 14.5 trillion won in business expenses by August of last year, an increase of 8.3 trillion won compared to August 2022 (6.2 trillion won).
This is a result of life insurance companies providing high levels of incentives to agents. In the first half of last year, large life insurance companies engaged in cut-throat competition by offering agents at general agencies (GA) selling their health insurance bonuses exceeding 20 times the monthly premium. Financial authorities have determined that if excessive spending on business expenses continues, it could worsen the financial soundness of insurance companies, lead to inadequate sales due to the overheating of new contract sales, and decrease retention rates, resulting in consumer harm.
Financial authorities are also pursuing measures to sanction insurance companies that do not pay commissions and other fees within the business expense limits set in their foundational documents. The aim is to eradicate irresponsible commission policies, according to financial authorities.