Kang Seung-woo is the Business Desk editor at The Korea Times. Prior to this position, he covered politics, national affairs, finance and sports.
Insurers face allegations of price rigging, corruption
By Kang Seung-woo
By Kang Seung-woo
Greed and irregularities are sweeping the local insurance industry, latest figures showed Wednesday.
A large number of insurers were slapped with fines for price rigging, while their misleading product sales are on the increase, leading to more customer complaints being filed with the courts.
In addition, many of their high-paid auditors are from government authorities such as the Financial Supervisory Service (FSS), National Tax Service (NTS) and Board of Audit and Inspection (BAI), and are said to be shielding the insurers from charges of corruption.
Last week, the Fair Trade Commission (FTX) fined 12 life insurance companies a combined 365.3 billion won ($320.36 million) for colluding to fix interest rates for years.
The 12 entities are Samsung, Kyobo, Korea, Mirae Asset, Shinhan, Tong Yang, KDB and Heungkuk life insurances, ING Life Korea, AIA Life Korea, Metlife Korea and Allianz Life Korea.
Samsung Life was ordered to pay the largest amount in penalties at 157.8 billion won, followed by Kyobo Life and Korea Life, which have to pay 134.2 billion won and 48.6 billion won, respectively.
According to the antitrust watchdog, they conspired to rig interest rates applied to deposits set aside to pay clients between 2001 and 2006.
Interest rates are a key factor that determine insurance premiums and the amount of money clients can receive in the future. The FTC said that those insurers colluded in a way that allowed them to better retain customers and maintain overall profitability.
Along with the latest case, the insurance sector has a disgraceful track record of collusion linked-fines.
In 2008, 14 life insurers, 10 non-life insurers and the National Agricultural Cooperative Federation, or Nonghyup, were fined 26.5 billion won for plotting to fix interest rates while several non-life insurers were handed a 50 billion won fine for the same reason.
Several insurance firms, affiliated with conglomerates, heavily benefit from their parent companies’ intra-group trading.
The unfair practices are feared to be stifling competition and the growth of other small- and medium-sized companies, while being exploited for illegal inheritance transfer.
Samsung Life Insurance and Samsung Fire and Marine Insurance, the financial arms of Samsung Group, also added 57.7 percent and 40.7 percent, respectively, in terms of the retirement pensions from their parent groups to the overall figures.
According to the FSS, Samsung Life had financial transactions worth 54.44 billion won with Samsung affiliates between April and September. Samsung Electronics, the flagship unit of the group, deposited 16.7 billion won as individual pensions, while Samsung Fire and Marine and S1, a security service provider, deposited 13.4 billion won and 14 billion won, respectively, as retirement pensions.
As for Samsung Fire and Marine, it attracted 122.6 billion won from Samsung Electronics, the world's largest memory chip maker with package insurance that includes several varieties of policies grouped together.
In addition, Samsung Life is blamed for only accepting Samsung card in taking premium payments, so those who do not have one have to pay in cash or sign up for the credit card.
Lotte Insurance, a non-life insurance arm of retail giant Lotte Group, accumulated 224.5 billion won from the group’s subsidiaries as of the end of June, representing 95.4 percent of its overall 235.3 billion won reserves.
“Although the conglomerates’ intra-group trading is not illegal, their affiliates consequently make bigger profits,” said an official of the financial industry.
The FSS, the nation’s financial watchdog, has been closely monitoring the intra-trading since its Governor Kwon Hyouk-se warned of the practice in August.
In the first half of this year, there were 5,879 grievance meditations against non-life insurance companies and 378 cases, or 6.4 percent, were taken to court.
Among the lawsuits, only 32 cases were filed by customers and the remainder, or more than 90 percent, were lodged by insurers.
Experts say that non-life insurance firms exploit the current law that stipulates grievance mediation cannot be proceeded with when a lawsuit is filed at the same time.
Although a customer files for grievance settlement, it can be cancelled out if an insurer takes the case to court.
As individuals are generally unfamiliar with legal matters, they often surrender to insurers, complying with what they demand.
“Insurance companies are badly taking advantage of this by over-filing lawsuits,” said Cho Nam-Hee, chief of the Korea Finance Consumer Federation (KFCF).
“To protect customers, it is required to enact a special law that allows grievance mediation to go with the law.”
Meanwhile, the insurance industry is enjoying high salaries and paying out large dividends, according to the FSS.
The government spent more than 21 trillion won in public funds to bail out the industry since the Asian currency crisis in 1997.
The annual salary of registered directors at 13 insurance companies averaged 936 million won in fiscal 2010, according to the FSS.
Meritz Fire and Marine Insurance topped the list with 3.14 billion won, followed by LIG Insurance at 1.63 billion won and Samsung Life at 1.45 billion won.
Hyundai Marine and Fire Insurance and Korean Re, the nation’s leading reinsurer, also paid their registered directors more than 1 billion won last year, at 1.09 billion won and 1.03 billion won, respectively.
The trend for high salaries continued this year, as their monthly pay averaged 49.18 million won in the second quarter of this year.
As for employees’ salaries, they averaged 59.40 million won last year and employees of Korean Re received 90 million won, followed by those of Samsung Life, Samsung Fire and Marine and Hyundai Marine and Fire, all of whom were above the average.
Insurance companies were also active in paying dividends.
Korea Life paid out 42.1 percent of its net profit in dividends in 2010, while LIG Insurance’s payout ratio was 36.02 percent.
The dividends of Hyundai Marine and Fire, Meritz and Korean Re were all more than 30 percent of their net earnings.
Recently, the financial authorities urged local financial institutions to stem excessive dividend payments and set aside enough money to brace for worsening shockwaves coming from the ongoing global uncertainty.
Despite the high salaries, outside directors or auditors, who are from government watchdogs, have failed to catch their irregularities every year.
Currently, eight insurers out of 12 listed players fill their auditors with former FSS officials.
The eight are Dongbu Insurance, LIG, Hyundai Marine and Fire, Korean Re, Samsung Fire and Marine, Meritz, Tong Yang Life and Hanwha General Insurance.
Critics say that a large number of auditors are overlooking troubles in the insurance industry by lobbying the authorities rather than checking management corruption.