GA Agents' Mis-Selling Could Lead to Executive Sanctions

Yoo Young-kyung, a partner at Deloitte Anjin Accounting Firm, stated on the 26th at the Deloitte Anjin headquarters in Yeouido, Seoul, in an interview with the Korea Economic Daily,

Insurance Companies with Assets Over 5 Trillion Won Must Submit Accountability Structure by Next July

Executives Cannot Escape Responsibility for Mis-Selling

"They Must Exercise Due Diligence in Performing Their Duties"

Yoo Young-kyung, a partner at Deloitte Anjin Accounting Firm, stated on the 26th at the Deloitte Anjin headquarters in Yeouido, Seoul, in an interview with the Korea Economic Daily, “Once the accountability structure is introduced in July next year, executives will be responsible for their respective areas concerning any mis-selling that occurs at the frontline. This could lead to a significant shift in the internal control culture within the insurance industry.”

Yoo, a partner at Deloitte Anjin, emphasized that the introduction of the accountability structure would require executives to inspect their own areas of responsibility for any issues. "In the past, the insurance industry was rife with mis-selling and moral hazard under a culture of 'let's sell as much as possible because everyone else is doing it'. After the introduction of the accountability structure, executives must ensure there are no issues in their areas of responsibility," she said.

The accountability structure is a document that clearly defines the responsibilities of top executives, including CEOs, regarding internal controls and risk management. If financial incidents occur and executives have not exercised 'due diligence' in their management duties, they may face sanctions such as dismissal recommendations.

Recently, the insurance industry has raised concerns about mis-selling due to excessive competition in short-term whole life insurance and single-room hospitalization benefits. The Financial Supervisory Service (FSS) pointed out that if the revised governance law were in effect, the CEOs and management teams of insurance companies would be deemed to have violated the law due to their failure to implement adequate internal controls and due diligence.

Yoo added, "Insurance company executives will also be held responsible for managing mis-selling incidents occurring in General Agencies (GAs) or bancassurance (insurance sold through banks). During the product launch and sales process, executives responsible for products, consumer protection, senior actuaries, and compliance officers must each perform their duties properly."

Yoo, one of the few female partners at a 'Big 4' accounting firm, is highly regarded for her understanding of the insurance sector, particularly regarding the new International Financial Reporting Standards (IFRS 17) for the insurance industry, M&A advisory, and external audits. Below is a Q&A with Yoo.

Q: There is just over a year left until the introduction of the accountability structure for insurance companies. How do you assess the current preparation level of these companies?

There are about 30 insurance companies with assets over 5 trillion won that must submit their accountability structure by July next year. Financial holding group-affiliated insurance companies have started preparing for the accountability structure, and many companies are beginning to seriously consider how to establish and operate it.

However, simply preparing an accountability structure is not enough. To ensure effective internal control, each executive must make an effort to identify areas for improvement. The CEO must review what support is needed across the company for weak internal control areas and what is being missed from the perspective of senior executives. Considering the need to establish such a system, it is advisable to accelerate preparations as much as possible within the remaining time.

Q: What differentiates the accountability structure for the insurance industry from other financial sectors?

Insurance companies need to consider not only regulatory sanctions and consumer complaints but also risk-focused soundness management, efforts to establish a culture of complete sales, and the improvement of systems for fair insurance claims. 

Internal controls for managing and supervising sales channels are also crucial. Responsible executives must ensure the prevention of excessive competition and the establishment of a complete sales culture. The accountability structure must reflect whether the planning and strategy for sales commission systems are sufficient to prevent excessive competition, whether periodic education for sales agents contributes to a culture of complete sales, and whether criteria and procedures for internal control are established.

Q: How effective will the introduction of the accountability structure be in preventing mis-selling in the insurance industry?

The development of insurance products involves multiple departments participating in and overseeing the process. With the introduction of the accountability structure, executives in relevant departments, including the CEO, must be able to prove they have fulfilled their management responsibilities. 

If mis-selling occurs due to excessive competition, the executive responsible for managing and overseeing the sales organization will be held accountable. The CEO must also review whether there were any systemic failures from a managerial perspective.

Q: Given the diversity of sales channels in the insurance industry, such as exclusive channels, bancassurance, and GAs, will executives be held responsible for mis-selling incidents involving external partners?

For partnerships with banks or GAs, internal control issues regarding whether the partnership standards are appropriate and whether management according to these standards is conducted effectively need to be addressed. The role and responsibility of frontline sales executives will see significant changes with the introduction of the accountability structure. Currently, there is a strong perception that internal controls for sales channels are managed by compliance and other second-line departments.

However, with the new structure, sales executives will need to implement and report their management actions directly to the CEO. Executives in charge of each sales channel must design detailed responsibilities related to sales goals, strategy management, and the establishment of a healthy recruitment order.

Q: There are concerns that the revised governance law might be seen as a financial version of the Serious Accident Punishment Act, with criticism that it could lead to overly cautious and defensive decision-making by financial executives. What are your thoughts?

The accountability structure is intended not to punish executives but to prevent financial incidents and effectively enhance internal controls. CEOs will be held responsible if they do not fulfill their duties in the implementation of internal control policies and strategies. However, if executives can prove they have exercised substantial caution, they may be exempt from or receive a reduced penalty. Therefore, it is crucial to establish and operate a system that can demonstrate compliance with the accountability structure.