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1、05/31/07
Competition and Regulation in the Korean Automobile Insurance Industry
Wondon Lee*
Soga Ewedemi**
* Associate Professor of Insurance, Daegu University, South Korea
wlee@daegu.ac.kr
** Professor of Finance, Clarion University of Pennsylvania, U.S.A
ewedemi@clarion.edu
2、
1. Introduction
The Korean property and liability insurance industry had assets of US$49 billion and direct premiums written of US$25 billion in 2005, which was the second largest market in Asia and 10th in the world (Swiss Re, 2006). Automobile insur
3、ance accounted for 35.2% of the total premiums written, which is the important business line in the Korean property and liability insurance industry. In 2005 Korean property-liability insurance statistics shows that the share of direct premium of long-term insurance is 47.9%. However, long-term ins
4、urance is simply a product in which an assumed interest rate is used for rate-making and of which insurance period is usually greater than or equal to 3 years. Long-term insurance products have been usually developed for accidental and sickness insurance, general property insurance, and even indivi
5、dual annuity. Due to large premium income in nature long-term insurance has grown up rapidly since its advent in 1969. That is the reason why a portion of direct premium from automobile insurance is quite less than around 50% unlike other countries with the fully developed property-liability insur
6、ance industry.
Since the monopolized market was opened to all the property and liability insurance companies in 1983, Although some property and liability insurance companies were licensed to sell automobile insurance after the Korean War (1950-1953), there was no actual business due to a lack o
7、f experience and uncertainty about its profitability. In 1957 the growing social concern about protecting persons injured by automobile accidents led to establish Korea Automobile Insurance Company operated by the National Automobile Transportation Association. After 4 year operation the company w
8、ent bankruptcy due to mismanagement. Right after that, in 1962, a new Korea Automobile Insurance Company was established in the form of an insurance pool by 10 property and liability insurance companies. The company was converted to a stock company in 1968. Since 1962, the Korean automobile insur
9、ance industry has been monopolized by one company under a strict government control until the industry was opened to 13 property and liability insurance companies including 2 foreign companies in 1983.
the average growth rate of direct premium is over 18%. This rapid growth rate is attributed m
10、ainly to the dramatic increase in automobile usage and compulsory automobile liability insurance. Compulsory automobile liability insurance for bodily injury began in 1963 and also liability for property damage was mandated in 2004.
However, automobile insurance has not been a profitable busi
11、ness since the advent of competition in the market in 1983. During 23 fiscal years including year 2005 the automobile insurance industry experienced underwriting profits only two times in 1997 and 1998. Although underwriting losses have been totally or partially offset by investment profits, the i
12、ndustry has been believed to experience chronic operating losses. The Korean property-liability insurance companies do not disclose investment profits attributable to the fund from the automobile insurance sector since they do not have separate investment accounts according to the business lines.
13、
The huge aggregate losses have been based on complaints about a strict government regulation and demands for changes and improvements in the regulation, including increases in premium (the price of insurance). In fact the history of the Korean automobile insurance industry is the history of dere
14、gulation on the industry. However, in spite of the series of deregulation the situation has not been much improved.
The continual unsatisfactory performance could be ascribed to the more fundamental problems in this industry. Unfortunately it is hard to find more thorough study and analysis to
15、find the fundamental problems about the automobile insurance industry in Korea. In this paper, we extensively examine the Korean automobile insurance industry in the context of the structure-conduct-performance (S-C-P) framework of industrial organization. The content of this approach is that exoge
16、nous basic conditions determine market structure and that there is unidirectional flow of causality from market structure, through conduct, to performance. (Reid, 1987)
We also analyze the regulatory environment in which this industry operates and the possible effects of regulation and deregulat
17、ion on industry performance as well as on industry structure and conduct.
The study begins with an analysis of the structure of the automobile insurance industry with a brief history. This chapter deals with market concentration, entry barriers, and economies of scale as well as production. The
18、 third chapter examines the pricing behavior of the industry under the tariff system imposed by the government and the price liberalization starting in 1994. The effects of antitrust law against a cartel-like pricing behavior are presented. Chapter 4 examines the performance of the automobile insu
19、rance industry in the context of profitability of business and affordability and availability of insurance coverage.
In the final chapter, some policy implications are proposed based on the analyses and concluding remarks follow.
2. The structure of the automobile insurance industry
Bri
20、ef history
In Korea a true automobile insurance business has begun with the establishment of Korea Automobile Insurance Company (KAIC) in 1962, which was funded by 10 incumbent property and liability insurance companies. Before 1962 Korean property and liability insurance companies’ operation had
21、been confined mainly to fire and marine insurance, even though they had licenses to sell automobile insurance. They thought automobile insurance was very risky and unprofitable business since the market was very small with about 30,000 cars in the country and there was no accumulated data for rate-
22、making.
However, growing public concerns about automobile accident victims forced property and liability insurance companies to make an insurance pool to provide automobile insurance coverage on a voluntary basis. The outcome was an insurance pool, so called KAIC, which was converted to a stock
23、company in 1968. In 1963 following year of the establishment, bodily injury liability with a policy limit became compulsory by the law. Since 1963, with rising automobile usage, the automobile insurance has become increasingly important in Korean property and liability insurance industry. Till 19
24、97, when the long-term insurance overtook, the automobile insurance had been the largest part of the Korean property and liability insurance industry. shows the premium distribution by lines of property and liability insurance from 1963 to 2005.
Since 1962, the automobile insura
25、nce industry had been monopolized by one company under a strong government control until the industry was opened to 13 property and liability insurance companies including 2 foreign companies in 1983. Even after being seemingly the open market, the automobile insurance industry had been heavily reg
26、ulated. All companies were required to use government-authorized premium rates, providing the same products at the same price. The rating bureau, Korea Insurance Development Institute, had made gross premium rates based upon whole industry data until 2001, when the liberalization of premium loading
27、s was getting started by individual companies.
There had been no price competition in the Korean automobile insurance industry. New entries to the market were virtually prohibited by the vague provision, so called ‘Economic Need Test’, ‘Economic Need Test’ means that the government arbitrarily
28、 judges whether the country needs another insurance company when a company applies for a insurance license.
by which the government has the sole power to give a license to sell the automobile insurance.
However, the regulatory environment was drastically changing with the 1996 affiliation wit
29、h OECD (Organization for Economic Cooperation and Development) and the 1997 financial crisis. In 1997 to overcome a possible moratorium, the Korean government borrowed emergency funds from IMF, IBRD, and ADB.
By OECD, as a quasi-regulator, and IMF, as a creditor, the Korean government was stron
30、gly advised or/and required to remove government controls over the financial activities. Deregulation by external forces was directed to an open competition. One of two major changes in regulation was to remove an ‘Economic Need Test’ from a license rule. Now anybody can do an insurance business
31、if clearly specified entry conditions are met. Secondly, price competition has started since August, 2000 when an expense loading of gross premium was liberalized. One year later the expected claims cost, pure premium, can be determined by an individual company based on its own loss experiences.
33、te)
6,487
(17.3%)
7,321
(12.9%)
7,895
(7.8%)
7,942
(0.6%)
8,506
(7.1%)
8,781
(3.2%)
Number of Firms, Entry and Market concentration
In 1983 when the automobile insurance market was shifted to a competitive market from the monopoly, 13 property and liability insurance comp
34、anies including 2 foreign companies took part in the market. All domestic companies were stock companies. There is no mutual company in the Korean insurance market. Until 1999 when one foreign company withdrew an automobile insurance line, there had been no change in the number of firms in the au
35、tomobile insurance industry. In year 2000 one domestic company went into bankruptcy. This company was actually a foreign company since the company was purchased by a foreign capital a year ago.
Only 11 companies started year 2001.
In 2001 the first automobile mono-line insurance company ent
36、ered the market after the entry regulation was changed. Two more mono-line companies joined the automobile insurance industry in 2003. Mono-line companies attacked the market with lower prices by using tele-marketing and internet marketing channels. With the advent of mono-line companies, real pr
37、ice competition started in the Korean automobile insurance market. As of March, 2006, 14 out of 28 property and liability insurance companies sell automobile insurance in Korea.
40、2
30.8%
70.5%
1630
2003
14
30.0%
68.8%
1562
2004
14
29.6%
68.5%
1532
2005
14
28.0%
68.3%
1467
* Korea Fair Trade Commission considers a market concentrated if CR10.5 and CR30.75.
** The Horizontal Merger Guidelines issued by the US Department of Justice and the Federal Trade Co
41、mmission classify markets as under: 0
42、 There are 4 companies with total annual premiums of over 1 trillion KRW and 10 companies with less than 1 trillion KRW. The so-called “Big 4” companies account for about 70% of the market. Usually it is of interest to ask whether or not the larger companies have a cost advantage over the smaller
43、companies. Substantial cost advantages could indicate barriers to entry and the possibility that large companies could set prices substantially above marginal cost without provoking competitive entry. However, it is hard to expect that kind of pricing behavior since there was no price competition
44、in the market before year 2000 when the tariff system was partially lifted.
If there are economies of scale present, we would expect the expense ratio to decline with firm size. The economies of scale analysis performed here relates expense ratios to direct premiums written of only 10 out of 14
45、companies. Since one in bankruptcy and three newly entered companies have shown abnormal expense ratios, these companies are excluded in the analysis.
(Year 1999) ER = 38.72 － 0.0000035DPW
(29.45) (－1.811)
R2 = 0.29
(Year 2000) ER = 40.99 － 0.0000059DPW
(13.69) (－
47、 (20.91) (－0.749)
R2 = 0.07
(Year 2005) ER = 38.34 － 0.0000043DPW
(12.77) (－1.498)
R2 = 0.22,
where ER = Expense Ratio and DPW = Direct Premium Written.
The results of simple regression analysis provide only weak evidence of scale economies. Although the coefficient of th
48、e premium volume variable is negative in all cases, it is significant at the 5 percent level only in year 2003. Adding one more variable, a ratio of net premium to direct premium to reflect reinsurance activity does not yield any better results.
Distribution Channels
49、tribution by Channels in Automobile Insurance>
(KRW in billions)
Year
Direct
Writing
Solicitors
Agents
Brokers
Total
2001
243
(3.3%)
2,608
(35.6%)
4,486
(61.1%)
-
7,337
2002
367
(4.6%)
2,534
(32.0%)
5,013
(63.4%)
-
7,914
2003
604
(7.6%)
2,427
(30.5%)
4,923
(61.
51、verage of traditional companies
31.4%
31.9%
32.3%
Year
2001
2002
2003
2004
2005
On-line Firms
0.4%
2.0%
3.3%
5.3%
6.6%
Incumbent Firms
-
0.3%
1.2%
1.9%
3.6%
Total
0.4%
2.3%
4.5%
7.2%
10.2%
3. The conduct in the industry
52、
How price is set
The way in which the volume, quality, and range of products are determined
4. The Performance of the Industry
Profitability
Since 1983 when the automobile insurance business was opened to the incumbent property and liability insurers, the insurers have complained that the
53、y are consistently losing large sums of money in operating the automobile insurance line. If they successfully convinced regulators, they were allowed to increase premium rates and improved loss ratios and underwriting profits. However, discussions of premium rates have often been based on misinfo
54、rmation about profitability in the industry.
A traditional profit measure used in the property and liability insurance industry is the combined ratio. This ratio is very handy and provides some useful information about the insurance industry. However, it has often led to incorrect conclusions a
55、bout profitability. The combined ratio, which is the sum of the loss ratio and the underwriting expense ratio, is used as an indicator of profitability. The loss ratio is an estimate of expected payments for reported and unreported claims, expressed as a ratio to earned premiums. It is conventiona
56、l that expected claims payments include loss adjustment expenses which are incurred to investigate and settle claims. In Korea, however, these expenses, about 2% of earned premiums, are considered a part of underwriting expenses. This practice allows the insurers to underestimate loss reserves.
57、
The underwriting expense ratio considers the expenses associated with writing insurance policies expressed as a ratio to earned premiums. A combined ratio over 100% indicates an underwriting loss. However, an insurance company can have a combined ratio over 100% and still be profitable, due to
58、the fact that the combined ratio does not take into account earnings from investment income, which can offset underwriting losses.
shows the combined ratios of the automobile insurance industry from year 1983 to year 2005.
As a way to correct the combined ratio for investment
59、income the overall operating ratio was introduced. The operating ratio is the combined ratio minus the ratio of investment income to premiums earned. Investment income is usually allocated by line on the basis of reserves (Cummins and Weiss, 1991) because data are not directly available on the inv
60、estment income attributable to a particular line. To allocate aggregate investment income to the automobile insurance line, we assume that the share of total investment income is proportional to the share of total invested assets on the basis of the sum of unearned premium reserve, loss reserve and
61、 contingency reserve for the automobile insurance line. shows the operating ratios from year 1983 to year 2005.
The operating ratio is obviously a better measure of profitability as long as the insurers earn investment income from their invested assets funded by reserves to offs
62、et underwriting losses.
shows the estimated profitability of automobile insurance from year 1998 to year 2005. The reason we choose year 1998 is that market valuation in assets and loan quality classifications have been used in the Korean insurance industry since 1998. However, the fair
63、 valuation method is not used in reserve valuations. If the reserves are not discounted, the claim payments that may not be made for several years are recognized as costs in the current year, thereby understating annual income.
64、8 to 2005>
(KRW in billions)
Year
Premiums
Earned
Incurred
Losses
Net
Expenses
Underwriting
Gains
Investment
Income
Operating
Gains
1998
5,084
3,134
<61.6>
1,650
<32.4>
300
<94.0>
295
<5.8>
595
<88.2>
1999
4,778
3,477
<72.8>
1,719
<3
汽車專業(yè) 畢業(yè)論文 翻譯 中英文Competition and Regulation in the Korean Automobile Insurance Industry -
