"Change Short-Term Performance-Based Evaluations"—Financial Supervisory Service Warns Insurers to Improve KPIs

[Financial News] The Financial Supervisory Service has called on the insurance industry to improve its key performance indicators (KPIs). The move is aimed at addressing the industry-wide decline in trust caused by indicators focused on short-term results.
On the ninth, the Financial Supervisory Service held a workshop on improving performance-evaluation practices at the Korea Life Insurance Association’s Education and Culture Center for 49 executives from insurance companies and insurance associations. The workshop focused on the results of inspections of insurers’ KPIs, cases cited during examinations, and the operation and disclosure practices of performance-evaluation systems in major overseas markets.
The Financial Supervisory Service’s review of performance-evaluation systems identified several shortcomings, including CEO evaluations centered on short-term results, insufficient incentives for sound management over the medium to long term, and the perfunctory design and operation of consumer-protection performance measures. Many insurers were found to place excessive emphasis on short-term financial results when evaluating profitability and growth, while failing to reflect future losses arising from incorrect actuarial assumptions in executive evaluations.
The review also pointed to the continued emergence of incentives to pursue short-term results, such as setting overly optimistic actuarial assumptions and excessive business-expense spending, raising concerns about possible moral hazard among executives. Insurers’ indicator designs were found to be inadequate in managing actual-versus-expected variances, basic capital ratios, and duration gaps while taking medium- to long-term soundness into account. The proportion assigned to consumer-protection indicators was also low.
The workshop emphasized the need to strengthen consumer-protection indicators in the KPIs of executives responsible for each stage of a product’s life cycle, including product design and manufacturing, sales and maintenance, and insurance-claim payments. It also called for avoiding performance indicators that conflict with consumer interests and for more precisely reflecting efforts to maintain and manage insurance contracts over the long term. In product design and manufacturing, consumer-protection indicators were insufficient because evaluations focused on profitability and growth, and no post-sale penalties were imposed for flawed product designs. In sales and maintenance, the performance of sales executives was evaluated mainly on short-term persistency rates, creating insufficient incentives to maintain long-term contracts. In claims payments, the inclusion of loss-ratio management in the performance evaluations of claims executives raised concerns that it could encourage the denial of insurance claims and conflict with consumer interests.
Park Ji-sun, a vice president of the Financial Supervisory Service, pointed out that the performance-evaluation system is linked to the fundamental cause of the short-term performance-focused management culture that has become widespread in the industry since the implementation of IFRS 17 Insurance Contracts. Park urged insurers to improve their systems, saying, "A company’s KPIs are not merely tools for measuring personnel decisions or compensation levels. They form the foundation for embedding the company’s management philosophy and goals in its organizational culture, which makes the precise design of performance-evaluation systems even more important." Park added, "Efforts are needed to ensure that insurers’ performance-evaluation systems move away from a focus on short-term and superficial growth and are designed, from a medium- to long-term perspective, to balance sustainable growth, financial soundness, and consumer interests."
[email protected] Park Moon-soo Reporter