Moral Hazard in Insurance Claiming from a Korean Natural Experiment

This paper presents evidence on moral hazard in auto insurance using a panel data set on all auto insurance companies in Korea. In January 2010, Korean financial regulatory authorities suddenly changed the automobile bonus-malus system such that the threshold of the premium surcharge for collision coverage was increased by 300 per cent, while insured parties’ payments of loss remains unchanged. One year later, however, claimants were required to bear 20 per cent of the loss. This sudden and exogenous regulatory change provides an ideal environment to analyse moral hazard because of the natural setting of the experiment. The empirical results obtained through a fixed-effects model indicate that a rise in the threshold led to a rapid increase in the loss ratio, and the subsequent imposition of coinsurance requirements decreased the loss ratio even after controlling for the number of accidents and claims.