If the Financial Services Commission upgrades its prompt corrective action on Lotte Non-Life Insurance from a management improvement recommendation to a management improvement requirement, sales are expected to inevitably shrink. That is because existing policyholders, worried that there could be disruptions in receiving insurance payouts, may cancel their policies, and agents may reduce sales of the company's products. Lotte Non-Life Insurance now has to pursue a sale in parallel with restoring its financial soundness.
According to the financial authorities on the 29th, the Financial Services Commission plans to notify the company soon of its decision at the regular meeting the previous day not to approve Lotte Non-Life Insurance's management improvement plan. The Financial Services Commission believes the capital-raising measures and other items in the plan Lotte Non-Life Insurance submitted were not specific. Once it receives the notice from the Financial Services Commission, Lotte Non-Life Insurance must rewrite and resubmit its management improvement plan. The Financial Services Commission is expected to decide in March whether to approve the plan.
The Financial Services Commission decided in Nov. last year to issue a management improvement recommendation to Lotte Non-Life Insurance, judging that its capital management adequacy and sustainability were insufficient. In response, Lotte Non-Life Insurance on the 2nd submitted to the financial authorities a management improvement plan including cuts to operating expenses, disposal of nonperforming assets, and improvements to workforce and organizational operations, but the financial authorities did not approve it.
The Financial Services Commission plans to upgrade Lotte Non-Life Insurance's prompt corrective action from a management improvement recommendation to a management improvement requirement. Under current law, once a management improvement requirement is imposed, sanctions such as store closures and restrictions on new openings, workforce and organizational reductions, disposal of subsidiaries, and partial suspension of insurance business become possible. An official at the Financial Supervisory Service said, "We plan to take necessary measures based on current law in accordance with the Financial Services Commission's resolution."
Insurers that received prompt corrective actions in the past suffered major blows to their sales. MG Non-Life Insurance (now YeByeol Non-Life Insurance) received a management improvement requirement in 2021 and, in 2022, a management improvement order, the highest level of prompt corrective action. Failing to improve its business conditions, it posted a net loss of 53.3 billion won in 2021, and its net loss widened to 79.7 billion won last year.
According to the office of Yoo Yeong-ha of the People Power Party, refunds paid out when MG Non-Life Insurance policyholders canceled their products in the first quarter of last year (January to March) totaled 100.5 billion won, amounting to 73% of all 2024 cancellations (136.9 billion won).
There are also concerns that new sales could fall in major channels such as general agencies (GA). A GA industry official said, "For products from insurers facing tough business conditions, consumer anxiety is high, and agents are reluctant to sell them," adding, "There is also a high possibility that incentive programs (special allowances) are smaller than those of other companies, so agents may not prefer them."
JKL Partners, the private equity fund that is the largest shareholder of Lotte Non-Life Insurance, is seeking to sell the company, but if the upgrade in prompt corrective action worsens business conditions, it could become even harder to find a buyer.