Crackdown Begins on Illegal Activities of Insurance Sales Agencies

The Financial Supervisory Service (FSS) has started a special investigation into the performance of life insurance sales agencies in Korea. Significant repercussions are expected as the FSS is also looking into whether life insurance firms provided illegal subsidies to bigger agencies.

On May 1, it was confirmed that the FSS started a special inspection on April 30. Among 10,000 life insurance offices across the nation, big life insurance agencies that are suspected of engaging in unlawful sales activities were targeted.

The FSS has cracked down on illegal activities of non-life insurance agencies several times before. But for life insurance agencies, the special investigation was the first of its kind. Behind this investigation was an allegation that a number of life insurance agencies are doing excessive sales activities to make more people buy insurance policies. The number of life insurance agencies was 6,700 in late March 2006, but it soared to 10,100 late last year.

The special investigation will examine the number of insurance sales agents without license, the withdrawal ratio of policy applicants, and the amount of commission given to the agencies by insurance companies. Moreover, it will also look into whether the agents fully explained their insurance products and whether the insurance companies used multi level marketing.

The FSS decided to revoke the license of insurance sales agent offices that hired sales agents without a Korea Insurance Institute’s license. All insurance sales agents should get training from the institute.

Many insurance sales agents without licenses usually do not give full information on the risks of insurance products to potential policyholders. This makes life insurance policy applicants decide not to subscribe to a policy, causing inconveniences for customers.

Moreover, there are some ‘mixed agent offices’ that sell various insurance policies from different companies, and their influence is increasing. The investigation will also see whether these agencies got rebates from insurance companies who want to increase their market share.

‘Mixed agent offices’ mostly receive high commissions from insurance companies by collecting policies that their agents sell. The agencies give out part of the commission to the agents, and the rest is their profit.

In some cases, insurance companies pay more to mixed agent offices with good performance, especially when they sell more of its policies than those of its competitors.

The FSS decided to investigate the amount of commission given by insurance companies to agencies, since high commissions can increase company costs and policyholder premiums.

“We need to take preemptive measures against large life insurance companies because of their unlawful activities that cause disruptions in the market,” said one supervisory official.

legman@donga.com