The Changing Landscape of the General Agency (GA) Market Amid Regulatory Tightening

As financial authorities strengthen internal control standards for General Agencies (GAs), 

As financial authorities strengthen internal control standards for General Agencies (GAs), the GA industry is likely to engage in mergers and acquisitions (M&As) to expand their scale. Particularly, smaller GAs may find it challenging to meet the new regulatory standards, putting their survival at risk. This blog will explore the changes in the GA industry and the direction of policies set by financial authorities.

Acceleration of Structural Reorganization in the GA Market

Recently, financial authorities have been tightening their control over GAs, which is expected to accelerate the structural reorganization of the GA industry. The Financial Supervisory Service (FSS) is establishing an operational risk regulation system for indirect management of GAs and plans to implement direct regulations in the future. This is expected to encourage GAs to pursue economies of scale through M&As.

Previously, financial regulations mainly targeted insurance companies, while regulations on sales agencies were relatively lenient. However, contrary to the original intent of enhancing consumer utility, various side effects have emerged in the GA industry. Issues such as weak internal control systems, the creation of false contracts, unfair replacement contracts, and violations of the duty to explain have been repeatedly pointed out. In response, the financial authorities have decided to strengthen oversight and management of GAs.

Strengthening of Internal Controls and Risk Management

The FSS plans to encourage insurance companies affiliated with GAs to increase their required capital based on the risk of operational accidents in sales channels and will establish evaluation criteria for this purpose. The lower the insurance company’s evaluation rating, the higher the required capital will be according to the solvency margin ratio (K-ICS), thereby reinforcing responsibility for GA management. Additionally, the FSS is considering measures such as entering into management improvement agreements with insurance companies that inadequately manage GAs.

Potential Surge in Mergers and Acquisitions Among GAs

Industry insiders believe that these strengthened internal control policies will likely lead to a surge in mergers and acquisitions among GAs. Subsidiary GAs or independent GAs operated around a central headquarters, which have stronger internal control capabilities, are expected to become more active in expanding their scale through partnerships or M&As with larger GAs.

Currently, there are over 70 GAs in the industry with more than 500 insurance agents, but smaller GAs may find it difficult to meet the internal control standards. As a result, they may be absorbed by larger firms or merge with each other, marking a new phase in the industry. An industry official commented, "Small GAs will struggle to survive as they cannot afford the economic and social costs required to establish internal controls."

Continued Efforts to Improve Internal Controls

In April, the FSS held an internal control workshop for large GAs with over 1,000 insurance agents and decided to improve the evaluation of their internal control operations. The evaluation results are expected to be disclosed publicly starting next year.

Oh Byung-guk, a research fellow at the Korea Insurance Research Institute, stated, "The financial authorities’ efforts to strengthen internal controls over GAs will continue. GAs should take this as an opportunity for growth and manage and operate more meticulous internal control systems."

Navigating New Challenges

The GA industry is facing new challenges amid tighter regulations from financial authorities. Expansion through M&As and the strengthening of internal control systems will be essential tasks. It will be interesting to see how the GA industry turns these changes into opportunities for growth.