The Financial Services Commission is pushing to overhaul commissions for selling insurance products. To fix the practice of excessive upfront commissions and strengthen policy maintenance services, it will introduce a "split-payment system" that pays sales commissions over a long period.
On the 14th, the Financial Services Commission said it approved a revision to the Regulation on Supervision of Insurance Business at a regular meeting. The overhaul of sales commissions was pursued with the goal of raising policy retention rates and enhancing policyholders' right to know.
Under the revision, a "maintenance and management commission" will be newly introduced that is paid only when an insurance planner maintains and manages a contract. The maintenance commission will be paid in installments for up to seven years, and an additional long-term maintenance commission will be paid in years five to seven of the contract. The longer a contract is maintained, the greater the compensation the planner receives.
The Financial Services Commission said the introduction of this split-payment system could lift Korea's policy retention rate, which stands at about 70% after two years. In major countries, the retention rate at month 25 is around 90%, significantly higher than in Korea.
To eliminate regulatory arbitrage, the "1,200% rule," which had applied only to commissions paid by insurers to general agencies (GAs), will be expanded to planners affiliated with GAs. All forms of monetary compensation paid in the first year—namely sales commissions as well as settlement support payments and incentive commissions—will be added together to calculate the cap.
In addition, to prevent arbitrage where the sum of sales commissions and surrender value exceeds premiums paid, the arbitrage prohibition period will be expanded from the current one year to the entire term of the insurance contract.
Disclosure will also be greatly expanded to strengthen consumers' right to know. Commission rates by product group will be compared and disclosed on the Korea Insurance Association website, and the shares of upfront commissions and maintenance commissions will be broken down in detail. Large GAs must provide a list of partner insurers when selling products and explain the commission level of recommended products using a five-tier rating and ranking.
Internal control systems at insurers will also be strengthened. Insurers' product committees will oversee the entire process from product development to post-sale, deliberating and deciding on expense load levels, profitability, and the possibility of misselling. If a product is deemed inappropriate, sales can be deferred or halted. The Financial Services Commission said it will form a task force with industry, experts, and consumer groups to ensure the system takes hold, and will respond strictly if the system is abused or consumers are harmed.