Insurers, customers suffer from `migratory` sales reps

A consumer living in Seoul recently received a notice from his district office to pay a fine of 300,000 won (270.5 U.S. dollars) for not having subscribed to mandatory car liability insurance.

He expressed frustration over the notice, saying, "I wasn`t keeping track because my insurance sales representative regularly notified me every year ahead of my policy`s maturity. I called the insurance company and they said the planner had resigned. This is ridiculous."

Amid a slowing economy and intensifying competition among insurance firms, more insurance sales representatives are moving to other insurers after collecting their sales commissions. Such "migratory" sales agents are leading to poor insurance policy management and bad customer service.

○ Fleeing after collecting commissions

The Financial Supervisory Service said Monday that the "13th month settlement," or the rate of insurance sales representatives working for 13 consecutive months, was 40.2 percent in March this year, down from 41.2 percent in September last year. This means that just a fourth of sales agents stayed at their companies.

The figure at life insurers was just 34.8 percent. The rate of insurance policy maintained for more than two years after the initial signing was 56.4 percent, sharply down from 61.2 percent in March last year.

High turnover means that customers have to shoulder the burden. A change in the planner in charge can lead to loosen customer management on overdue rates and brochure mailing.

Cho Nam-hee, secretariat of the Korea Finance Consumer Federation, said, "There are many cases of insurance contracts being nullified because of failure to tell customers of their overdue rate situation. Commission fees paid to the sales agent in the first year of insurance policy sales take up 90 percent of all commission fees, which only incurs negligence in maintenance and results in damage to customers from cancellation of insurance contracts."

A migratory sales representative often tells his or her old customers to cancel their insurance products and subscribe to the products of the representative`s new company.

An insurance planner who moved to another insurer asked a former customer living in Busan to switch to a new accident insurance policy. The customer switched to the new company but when he asked for a settlement after being hurt by an electric shock while handling a machine, he was told he could not get any benefits according to policy terms.

○ Overhauling of commission fee system

Recognizing the problem, the Financial Services Commission and the Financial Supervisory Service will set up a task force to streamline and reform the commission fee system.

The new system will divide commissions into sales and maintenance/management, and lower the commission fees given to the planner in the first year of contract by 10-20 percent. The remaining commission fees will go to the planner on a monthly basis.

The financial industry watchdog will also reform the practice of insurers shouldering initial commission payment costs in the following several years. The existing system makes difficult for insurers to pay sales commission early because of losses.

The amount refunded for early cancellation of savings insurance contracts will also be increased a maximum of 10-20 percent. The amount a customer is refunded after canceling the contract in the first year, which is 40-50 percent of insurance payments, will be raised to 60 percent, while the rate for cancellations in the second year will be lifted to 70-80 percent and in the third year to 90 percent.

An official at the Financial Services Commission said, "Studies suggest that operating a maintenance/management and sales separately lowers cancellation rates between 1.2 and 5.5 percent. We will reform the commission fee system considering customer protection and impact on insurers."

redfoot@donga.com