Financial Supervisory Service Announces New Risk Management System… Challenges and Opportunities for GAs

The Financial Supervisory Service (FSS) is planning to introduce a new system to strengthen the operational risk management of financial companies.

The Financial Supervisory Service (FSS) is planning to introduce a new system to strengthen the operational risk management of financial companies. A key aspect of this plan involves evaluating the sales quality of corporate insurance agencies (GAs) and differentiating the capital regulations for insurance companies based on this evaluation. This article explores the challenges that small and medium-sized GAs may face and the opportunities that may arise from these regulatory changes.  

The Financial Supervisory Service is taking steps to enhance the operational risk management of financial companies by introducing a new regulatory framework. On September 6th, the FSS held an inaugural meeting of the 'Financial Company Operational Risk Management Task Force (TF),' led by Senior Deputy Governor Lee Se-hoon. The task force discussed strategies to strengthen operational risk management across different sectors, including banking, insurance, card services, and information technology.

Operational risk refers to potential losses a company may suffer due to inadequate internal procedures, personnel issues, system errors, or external events. The establishment of this task force aims to better manage and prevent these risks within financial companies.

A significant part of the new framework is to expand existing regulations—previously focused on insurance companies— to also include sales agencies. For example, rules concerning commission rates that previously only applied to exclusive agents of insurance companies are now being considered for application to agents affiliated with large GAs. To implement this, the FSS is pursuing the introduction of an "Operational Risk Evaluation System" that strengthens the operational risk management of insurance companies. The core of this system is to establish evaluation criteria that consider the sales quality of GAs and assign ratings to insurance companies based on these criteria.

These changes are expected to significantly impact small and medium-sized GAs. Such GAs may face challenges related to the cost of building operational risk management systems and securing professional manpower. New regulations could also impose restrictions on their business activities, potentially leading to short-term revenue declines.

The FSS emphasized, "The details of this new system will be developed through discussions at the 'Insurance Reform Meeting,' and we will fully incorporate the opinions of the industry in establishing these policies." Since January, banks have been subject to an operational risk capital regulation that accounts for third-party risks, but no such regulation has been applied to other sectors. The authorities believe this has created unfair competition, as smaller financial companies, where manufacturing and sales are separated, have lower compliance costs than integrated financial firms.

Senior Deputy Governor Lee Se-hoon stated, "With the recent expansion of non-financial firms into the financial sector, atypical operational risks—such as data breaches involving Kakao Pay, incomplete sales by GAs, and payment risks with payment gateway companies (PGs)—are directly causing losses to financial companies." He further emphasized, "As the market size of relatively unregulated financial areas grows rapidly, there is an increasing need to establish a risk management framework to ensure that risks from these areas do not become sources of market instability."

The FSS's introduction of a new risk management system represents a critical turning point for enhancing the stability of the financial market. However, whether small and medium-sized GAs view this change as an opportunity or a challenge will depend on how they respond. It is essential for the regulatory authorities to develop balanced policies by considering the diverse opinions within the industry.