汽车专业-翻译-中英文(全)competition-and-regulation-in-the-korean-automobile-insurance-industry.doc

05/31/07

Competition and Regulation in the Korean Automobile Insurance Industry

Wondon Lee*
Soga Ewedemi**

* Associate Professor of Insurance, Daegu University, South Korea
[e-mail]
** Professor of Finance, Clarion University of Pennsylvania, U.S.A
[e-mail]

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 insurance 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 insurance 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 individual 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 insurance 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 of 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 went 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 insurance 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 mainly 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 business 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 industry 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.
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 deregulation 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 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 exogenous 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 deregulation 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 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 insurance 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

Brief 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 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-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 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 1997, when the long-term insurance overtook, the automobile insurance had been the largest part of the Korean property and liability insurance industry. <Figure 1> shows the premium distribution by lines of property and liability insurance from 1963 to 2005.

Since 1962, the automobile insurance 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 regulated. 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 loadings 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 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 with 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 strongly 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 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.

<Table 1: Recent Status of the Korean Automobile Insurance Market>

2000
2001
2002
2003
2004
2005
# of registered cars(1,000)
(growth rate)
12,210

(8.1%)
13,181

(8.0%)
14,211

(7.8%)
14,677

(3.3%)
14,990

(2.1%)
15,537

(3.6%)
Premiums Written(bil. KRW)
(growth rate)
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 companies 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 automobile 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 entered 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 price 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.

<Table 2: Market Concentration in Automobile Insurance Industry>
Fiscal Year
No. of Firms
CR1
CR4
HHI
1962-1982
1
100%
-
10,000
1983
13
89.7%
94.7%
8059
1984
13
59.6%
75.4%
3725
1985
13
45.1%
67.2%
2358
1986
13
35.2%
63.3%
1704
1987
13
27.5%
60.6%
1349
1988
13
22.4%
58.8%
1196
1989
13
19.9%
59.2%
1171
1990
13
19.3%
59.4%
1180
1991
13
18.2%
58.3%
1160
1992
13
16.8%
57.7%
1135
1993
13
16.1%
57.0%
1120
1994
13
15.9%
57.5%
1125
1995
13
19.3%
60.3%
1189
1996
13
23.4%
64.1%
1307
1997
13
25.9%
66.5%
1398
1998
13
27.9%
66.8%
1460
1999
13
28.2%
68.7%
1496
2000
12
29.3%
70.1%
1560
2001
12
31.3%
72.3%
1692
2002
12
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 Commission classify markets as under: 0<HHI<1000, not concentrated, 1000<HHI<1800, moderately concentrated, and 1800<HHI, concentrated.

Scale economies
There is a big range in the size (in terms of premiums written as well as assets) of insurance companies selling automobile insurance in Korea. 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 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 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 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) (－1.601)
R2 = 0.24

(Year 2001) ER = 33.66 － 0.0000012DPW
(23.99) (－0.827)
R2 = 0.08

(Year 2002) ER = 34.14 － 0.0000017DPW
(19.88) (－0.976)
R2 = 0.11

(Year 2003) ER = 34.82 － 0.0000026DPW
(36.18) (－2.656)
R2 = 0.47

(Year 2004) ER = 33.48 － 0.0000011DPW
(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 the 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

<Table 3: Premium Distribution 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
(61.8%)
6
(0.1%)
7,960
2004
724
(8.5%)
2,519
(29.6%)
5,267
(61.8%)
11
(0.1%)
8,521
2005
950
(10.8%)
2,635
(30.0%)
5,189
(59.0%)
16
(0.2%)
8,790

<Table 4: Expense Ratios of On-line Company vs. Traditional Company
Firm
2003
2004
2005
1 on-line company
24.2%
26.7%
26.7%
A