The Financial Supervisory Service (FSS) is taking action to address the insurance industry's self-destructive cutthroat competition and its performance evaluation practices focused on short-term results. The FSS plans to reform core performance indicators (KPIs) for chief executive officers (CEOs) and key executives to drive fundamental change.
On the 9th, the FSS held a "Workshop on Improving Performance Evaluation Practices of Insurance Companies" with senior officials from insurance companies, the Life and Non-Life Insurance Associations, and the Korea Insurance Research Institute in attendance.
Financial authorities have been continuously promoting institutional improvements to ensure recruitment order and consumer protection in the insurance sector this year, including establishing advanced actuarial guideline lines, publishing comparative disclosures of insurance sales commissions, and applying the "1200% Rule" to GA design agents. The FSS is now going a step further than improving individual sales and product-related regulations by deciding to overhaul the performance evaluation system itself that influences management decision-making.
This move comes from the judgment that the root cause of repeated cutthroat competition and consumer harm cases in the insurance industry lies in a performance evaluation system centered on short-term results, akin to "cutting one's own flesh."
In insurance sales, excessive expenditure on business expenses leads to cutthroat competition and incomplete sales. In product development, cancellations are rapidly increasing for products like high-return, short-payment whole life insurance aimed at short-term results, which could undermine liquidity and profitability in the long run. From an accounting perspective, since the introduction of the new International Financial Reporting Standards (IFRS17), cases have repeatedly occurred where optimistic actuarial assumptions boosted current-period earnings, followed by a sharp decline in profits due to large discrepancies between expected and actual experience, raising concerns about trust in the accounting and financial soundness of insurance companies.
In fact, an FSS review of KPIs for CEOs of major insurance companies revealed that most companies evaluate profitability and growth primarily based on short-term financial performance. Under flawed actuarial assumptions, future losses were not reflected in management evaluations at the time, raising concerns that this could incentivize overly optimistic actuarial assumptions or excessive business expense spending.
There was also a lack of indicators designed to consider medium- to long-term soundness, such as discrepancy between expected and actual experience (실차), basic capital adequacy ratio, and duration gap management. The weight given to consumer protection indicators was low, and some qualitative evaluation indicators were operated using items that are difficult to measure and evaluate objectively.
Improvement points were also identified in the evaluation system for key executives responsible for product development, sales, and claims handling. Post-penalties for consumer protection-related performance indicators and flawed product design were found to be insufficient. Sales executive evaluations were primarily based on short-term retention rates, which was found to reduce incentives for maintaining long-term contracts. For claims-handling executives, the inclusion of items such as "loss ratio management" in performance evaluations raised concerns that it could incentivize non-payment of insurance benefits and conflict with consumer interests.
Park Ji-seon, Deputy Commissioner of Insurance at the FSS, stated, "This is a forum for discussions to improve the insurance company's performance evaluation system so that it moves away from being centered on short-term results and instead considers the company's sustainable growth, financial soundness, and consumer interests from a medium- to long-term perspective. We will continue to provide necessary institutional support and communication to enable the insurance industry to change autonomously."
Based on the findings of this review, inspection citations, and overseas cases, the FSS plans to supplement the "Exemplary Practices for Management Compensation Systems" currently in pilot operation across the insurance sector this year. Through CEO roundtables and other forums, the FSS aims to encourage CEOs to establish performance evaluation systems centered on consumer value and a medium- to long-term perspective.
in FINANCE
