Strengthening Internal Controls in the GA Industry: Effectiveness and Future Outlook

The self-reporting period for written contracts, implemented to establish a healthy competitive order in the General Agency (GA) industry

The self-reporting period for written contracts, implemented to establish a healthy competitive order in the General Agency (GA) industry, concluded without significant results. Consequently, financial authorities are now focused on their next steps, with attention on the ongoing task force (TF) for improving the internal control evaluation manual. This article explores the reasons behind the failure of the self-reporting period, the subsequent actions of financial authorities, and the industry’s expectations and demands for the future.

In recent months, the Financial Supervisory Service (FSS) operated a self-reporting center for written contracts in the GA industry, aiming to establish a healthy competitive order. However, this initiative ended without notable success, disappointing both the GA industry and financial authorities, and highlighting the need for further measures.

Since June, the FSS has been operating a task force (TF) with the Korea Insurance Agency Association to improve the internal control evaluation manual. The TF includes major GAs such as Hanwha Life Financial Services, Prime Asset, iFA, and W Asset, which received the highest grade (excellent) in last year’s internal control evaluation. These companies are expected to contribute significantly to the development of new compliance and internal control strategies.

The failure of the self-reporting period revealed significant issues in the internal control systems of the GA industry. Despite the FSS's efforts from May to July to receive applications for written contracts from GA branches, no substantial achievements were made. This failure is attributed to the GA industry's lack of autonomous correction capability and concerns over the emergence of illegal activities due to penalty burdens.

Additionally, the FSS has announced measures to address prohibited practices like unjust replacement contracts and bypass contracts, and intends to strengthen institutional sanctions such as suspending GA operations to hold them accountable. The level of sanctions is expected to be significantly raised, potentially including the cancellation of registrations, demonstrating the FSS's firm commitment to strengthening internal controls.

The TF for improving the internal control evaluation manual is likely to reflect these aspects actively. This year, 33% of large GAs received below-average grades in the internal control evaluation, underscoring the urgent need for stronger internal controls. The FSS has been evaluating companies on a five-grade scale: excellent, good, average, poor, and risky. The fact that a significant number of GAs received grades below average indicates that the internal control level in the GA industry remains low.

Some GAs have criticized the evaluation criteria for lacking consistency. For instance, despite submitting the required documents in the same format as last year, some GAs received no points for certain items, as the FSS deemed them non-compliant with the evaluation criteria. As a result, some GAs are preparing to request a re-evaluation from the FSS.

An industry representative mentioned that starting next year, GA internal control grades will be disclosed to insurance companies and general consumers. This transparency will serve as a criterion for evaluating the industry's soundness, emphasizing the need for the industry to communicate its opinions on appropriate internal control standards.

The financial authorities and the GA industry must continue their close cooperation to enhance the effectiveness of internal control systems. Learning from the failure of the self-reporting period, more practical and effective internal control measures must be developed. It is hoped that the activities of the TF and the improved manual will contribute to establishing a healthy competitive order in the GA industry.