[Two Months Under the 1200% Rule] From Chasing New Contracts to Focusing on Retention... How the Installment System Will Reshape Insurance Sales

Rewards Concentrated on New Contracts...
Installment System Increases Incentives for Retention and Management

High Distribution Costs in the Insurance Industry...
Productivity Gains Remain Slow

Reducing Commission Competition and Focusing on Non-Price Competitiveness

Until now, insurance sales have operated under a system where greater rewards were concentrated on acquiring new contracts rather than managing existing ones. To correct this, the “1200% rule” was expanded last month to include General Agency (GA) planners; however, some point out that commission competition has not fully subsided in the field during the initial implementation period. Financial authorities plan to introduce the installment-based commission system, moving beyond merely limiting the cap on first-year commissions and revising the structure that currently frontloads rewards at the start of contracts. There is keen interest in whether the simultaneous implementation of both policies will redirect the focus of sales competition—from securing new contracts—to emphasizing contract maintenance and productivity.

Following the 1200% Rule, the Installment System... Overhauling Insurance Sales Compensation Structure

According to the insurance industry on August 25, the financial authorities plan to implement a four-year installment-based system for insurance planner commissions starting January 2027 and extend the installment period to seven years from 2029. Commissions, which were previously largely paid within one year of concluding an insurance contract, will now be distributed over the duration of the contract maintenance period. Whereas it was previously advantageous for planners to keep securing new contracts to boost their income, now there will also be financial incentives to retain and manage existing contracts.

The background behind the overhaul of the commission payment structure is the judgment that upfront compensation-centric systems have fueled excessive competition in the insurance sector. Insurers would present commission schemes and incentives to GAs, and GAs, in turn, would use the promise of high commissions to secure planners, thereby boosting new business.

This led to the so-called “high-value scout” competition, where companies increased new contracts by offering significant support allowances and retention funds to high-performing planners. Critics have pointed out that this structure of paying high rewards in a short time has exacerbated problems such as replacement contracts and orphan contracts. In this context, Shin Chang-jae, CEO and Chairman of the Board at Kyobo Life Insurance, remarked, “While neglecting ongoing services for existing customers, the industry has focused excessively on new contract performance, excessive commissions and incentives, and competition for planners.” He went on to emphasize that the installment-based system should serve as an opportunity to foster “farmer-type” planners who manage customers’ contracts to the end, rather than “hunter-type” planners who chase short-term sales.

Industry experts predict that the effect of the commission reform will truly take hold only when the 1200% rule and the installment-based system operate in tandem. While the 1200% rule, which was extended last month to include GA planners, limits the size of first-year commissions, the installment system goes one step further by changing the structural timeline of when rewards are distributed. Although both measures are part of the same package of commission reforms, they are being implemented sequentially, taking into account the readiness of sales channels and the impact on planner income.

The financial authorities are aware of the limitations stemming from the staggered implementation of these policies. An official from the Financial Supervisory Service commented, “The 1200% rule, the installment plan, and the overall commission cap must work in conjunction to complete the system, so it is regrettable that there is a time gap in their implementation.” Nonetheless, they added, “We will begin preparations and establish detailed guidelines for the installment-based system, which is scheduled to be implemented starting January next year.”

An industry official commented, “Merely limiting the cap on first-year commissions is not enough; only when the compensation is distributed over the maintenance period of the contract can we fundamentally change the sales practices skewed toward new contracts.”

Impact of Commission Installments on GAs and Insurers

With the introduction of installment-based commissions, it is expected that GAs will have to revise their strategies for recruiting planners, as they have traditionally relied on offering high upfront rewards. If commissions from insurers are paid over a longer period, GAs may have reduced flexibility in managing initial capital, such as retention funds and operating expenses. It is anticipated that smaller and medium-sized GAs, which have less financial liquidity, could face greater burdens from this system change.

For insurers, the regulation of sales commissions may help ease excessive competition for new contracts, potentially reducing the burden of new business expenses and improving contract profitability. Doha Kim, a research analyst at Hanwha Investment & Securities, stated, “If the competition for new contracts declines, expenses on replacement contracts and new business costs will decrease, resulting in a higher margin multiple and a slower reduction in the Contractual Service Margin (CSM) for existing contracts, which could increase the total balance of CSM. Policies such as next year’s installment-based commission system are likely to further support this trend.”

The installment system is also linked to the burden of surrender value reserves. If commission payments are deferred over time, unpaid commissions remain as insurance liabilities, potentially slowing the pace at which new reserves must be accumulated. Heeyeon Lim, a research analyst at Shinhan Investment & Securities, commented, “During the installment period, unpaid commissions remain on the market-value insurance liability, which keeps the liability amount temporarily elevated and narrows the gap that arises in calculating surrender value reserves. This results in a structure that is capital-neutral and only slows the accumulation of new reserves.”

She added, “The deferral effect is not a permanent reduction but rather a timing difference; as deferred commissions are paid out, previously postponed accumulation will follow accordingly. Although the introduction of installments yields a slowdown in the net increase of reserves, once the balance of unpaid commissions stops rising, the deferral effect disappears and the net increase reverts to its previous trend.” She also noted, “Given that the installment period will be expanded twice—to four years in 2027 and seven years in 2029—the overlap of these suppressed accumulation periods means it will take time for reserve accumulation to return to pre-reform levels.”

Insurance Companies Shift to Curb Commission Competition and Boost Non-Price Competitiveness

As commission regulations take effect, analysts say that insurers will need to focus less on boosting sales through commission incentives and more on enhancing planners’ productivity to maintain sales capabilities. With tight restrictions on increasing sales by raising commissions, the importance of non-price competition—such as product competitiveness and sales support—may grow.

The global consulting firm McKinsey, in a report released last month, identified high distribution costs and stagnant productivity as structural challenges for the global insurance industry. It found that 10–25% of premiums in the non-life segment, and up to 80% of first-year premiums in the life insurance segment, were spent on commissions and acquisition costs, while cost efficiency has barely improved over the long term.

McKinsey also suggested that artificial intelligence (AI) could likely be used to raise productivity by reducing the costs associated with product explanations and customer management—especially in the sale of complex insurance products. In other words, streamlining costs related to sales processes could allow each planner to handle more work and a larger client base.

In practice, Samsung Life Insurance is responding to heightened commission regulations by enhancing its non-price competitiveness with the use of AI. During a recent earnings conference call, the company predicted that the introduction of an overall sales commission limit in 2027 would reduce new business expenses by about 10%. Samsung Life Insurance stated, “We are working to increase the activity levels of our sales organizations to prevent a slowdown in sales under these changes. To this end, we are actively using AI tools, developing AI-driven sales scripts, and targeting annual new business CSM of over 3 trillion won.” The company also said, “We will provide comprehensive support during the sales process to differentiate planner competitiveness, and in the GA channel we are continuing to upgrade our AI sales support system and strengthen partnerships with large GAs.”

The Financial Supervisory Service is closely monitoring the market’s adaptation ahead of the full-scale implementation of the new system. An official commented that a task force is in operation to ensure the smooth adoption of the commission system, stating, “We are checking for any unreasonable aspects and will act swiftly to correct issues as they arise, since it is critical to prevent any side effects or confusion during rollout.”

A source in the financial industry added, “Consumers recognize the importance of careful contract management and long-term retention, rather than merely aggressive sales driven by high commissions. We anticipate a shift in the operating structure of insurance sales, which has been centered around upfront payments.”

This content was produced with the assistance of AI translation services.