Growth of the Driver Insurance Market in Korea
Over the past few years, the driver insurance market in Korea has shown robust growth, driven by strengthened legal regulations related to traffic accidents. From 2016 to 2022, the compound annual growth rate (CAGR) of initial premiums of driver insurance has remained high at 8.6%. Notably, in 2020, there was a significant increase in new sales as the legal penalties for accidents in child protection zones were reinforced.
The volume of new contracts has continuously expanded, with policy counts reaching 4.8 million and new business premiums amounting to KRW 50 trillion in 2022. The proportion of initial premiums has also increased to 15.3% of the total long-term insurance segment. While 2021 experienced a sharp slowdown in growth due to concerns about overheated competition, 2022 witnessed a resurgence in new sales, indicating a revitalized market.
The recent increase in new sales of driver insurance is primarily attributed to amendments in the Road Traffic Act and the expansion of coverage in driver insurance products. In 2022, amendments to the Act heightened the risk of criminal penalties for causing traffic accidents due to changes such as the expanded designation of protection zones for children (vulnerable road users), enhanced pedestrian protection at crosswalks, and stricter criteria for major and gross negligence accidents.
Driver Insurance Coverage
Motor insurance and driver insurance are distinct types of insurance coverage. The primary distinction lies in the scope of protection each provides. Motor insurance is designed to protect the car owner against financial loss in the event of an accident involving the vehicle. It provides property coverage for damage to or theft of the car as well as liability coverage for the legal responsibility to others for bodily injury or property damage. In contrast, driver insurance is tailored to protect a specific driver, regardless of the car they are driving. While car insurance focuses on the vehicle and its owner, driver insurance centers around providing coverage for the person operating the vehicle, irrespective of the ownership of the car in question. In Korea, motor liability insurance is compulsory, but driver insurance is not mandatory.
Recently introduced driver insurance products align with the latest trend of strengthened legal regulations related to traffic accidents. Most of the driver insurance products launched after 2022 offer expanded coverage compared to previous offerings. They provide additional coverage as endorsements to adapt to the legal reinforcement trend, including increased coverage and limits for costs to deal with accidents, attorney fees, and fines. There is also a tendency for increased insurance benefits for bodily injury arising from mild personal accidents.
As the driver insurance market has expanded, the experience loss ratio has decreased, with an increase in earned premiums. However, the net expense ratio is showing an upward trend because of higher acquisition costs. The net expense ratio increased from 28.6% in 2016 to 38.2% in 2022, while the loss ratio decreased from 64% to 56.6% during the same period. The combined ratio also improved to 94.8% in 2022 after exceeding 100% in 2019 and 2020 due to a sharp increase in sales and expense ratios.
For long-term insurance products in general, acquisition costs are initially high, while insurance claims are relatively low in the early stages. Therefore, it is common for the expense ratio to increase in line with rising sales at the beginning, while the loss ratio decreases.
The trend of strengthening laws for accident prevention is expected to continue, and in this context, it is expected that both the demand and supply for driver insurance products will keep expanding. As society continues to make efforts to prevent traffic accidents, there is a need to adjust the coverage and limits of driver insurance to cover the economic losses caused by traffic accidents.
Moreover, the supply of protection insurance products, which are expected to bring a higher contractual service margin (CSM), is likely to expand further, with the implementation of IFRS 17. From this perspective as well, it appears that there will be a continued focus on product development and sales expansion strategies for driver insurance products.
However, excessive competition through expanding coverage and limits could lead to mis-selling, moral hazard, and an increase in loss ratios. Increasing coverage and limits excessively can raise the likelihood of moral hazard for policyholders and may aggravate the insurance company's loss ratio.
In this respect, the Financial Supervisory Service (FSS) has issued guidance to raise consumer awareness of driver insurance and has encouraged insurance companies to exercise restraint in overheated competition and consider imposing coverage limits on attorney fees.
Concerns have been raised regarding insurers developing and selling driver insurance products in an unreasonable manner to increase the CSM, leading to a deterioration in the financial health of the insurers and an increased likelihood of mis-selling.
To address this, the FSS has decided to impose a maximum limit of 20 years on the coverage period of driver insurance. Currently, insurance companies have been setting coverage periods of up to 100 years. Policyholders aged 80 and above who may find it challenging to drive are not likely to actually receive meaningful coverage. This brings criticisms that the unnecessarily longer policy period may cause insurance churning - the practice of an insurer replacing existing coverage with a new policy based on misrepresentations.
Against this backdrop, it is important for insurers to pay close attention to product design and sales and seek proactive risk management, such as setting appropriate coverage limits and deductibles. Rather than offering excessive coverage, they need to develop and sell driver insurance products that encourage consumers to choose appropriate coverage levels in a way that prevents moral hazards among policyholders.