The 1200% Rule and Second-Year Commission Regulations: A New Challenge and Growth Opportunity for the GA Industry

Regulatory tightening in the insurance industry often brings significant disruptions, but sometimes it can also lead to positive changes.

Regulatory tightening in the insurance industry often brings significant disruptions, but sometimes it can also lead to positive changes. The recently implemented '1200% rule' and 'second-year commission regulations' are perfect examples of this. These regulations have helped create a healthier market environment, strengthen competitiveness, and provide new growth opportunities for the General Agency (GA) industry. In this post, we will explore the impact of the 1200% rule and second-year commission regulations on the GA industry.

1. Decrease in 'Eat and Run' Cases and Reduction in Manipulated Contracts: A New Order for the GA Industry

The '1200% rule' is a regulation that limits the recruitment commission that insurance agents can receive in the first year to a maximum of 1200% of the insurance premium. This measure was introduced to address issues like commission-driven sales practices, excessive organizational mobility, and "eat and run" cases within the GA industry. However, as this rule alone proved insufficient to eliminate the root problems, financial authorities strengthened the regulations to allow commissions beyond the second year to be paid in installments.

As a result, organizations dependent on manipulated contracts for surplus profit gradually disappeared from the market, and the occurrence of 'eat and run' cases significantly decreased. Additionally, the improved risk management practices of GAs have been positively recognized as contributing to the overall health of the industry.

2. Improved Revenue Structure and Restored Cash Flow for GAs

After the implementation of the 1200% rule, GAs struggled with cash flow as their first-year commissions were deferred to the second year. This led to some GAs closing or opting for mergers. However, over time, as contract retention rewards and deferred commission payments were introduced, GAs began to see smoother cash flow. Currently, GA profitability has improved significantly, providing them with an opportunity to grow into more robust and sustainable organizations.

3. Reduced Agent Turnover and Stabilized Organizations

The second-year commission regulation has also acted as a deterrent against indiscriminate scouting. With commissions being deferred and sustainability incentives only paid when contracts are maintained and agents remain employed, agent mobility has become more challenging than before. GAs now also face the burden of compensating for deferred commissions and sustainability incentives, leading to more careful organizational management. Coupled with a voluntary agreement limiting excessive scout payments, the organizational management capabilities of GAs have actually improved.

The introduction of the 1200% rule and second-year commission regulations initially posed significant challenges to the insurance industry. However, these regulations have ultimately helped to improve the GA industry's structure and provide opportunities for growth. GAs are now using these regulations as a chance to grow more robustly and sustainably. We look forward to seeing continued positive changes in the GA industry in the future.