A new rule limiting excessive treatment claims by drivers with minor injuries is cutting auto insurance loss ratios faster than expected, industry officials said. If loss ratios fall sharply by the end of the year, pressure to raise auto insurance premiums would ease significantly.
Some large insurers estimate the so-called eight-week rule has lowered their loss ratios by about 3 percentage points, according to financial industry sources on the 25th. Hospital stays for patients with minor injuries have shortened since the rule took effect, freeing up staff who had handled those cases for reassignment.
"We used to have to contact hospitalized patients directly to check whether they would be discharged, but that is no longer necessary," a senior industry official said. "We are reassigning those employees and cutting costs. The effect has been bigger than we thought."
The rule requires patients with grade 12 to 14 injuries, such as sprains and bruises, to obtain a medical review from a specialist at the Korea Automobile Compensation Agency if they need treatment beyond eight weeks. It applies to accidents that occurred on or after Sept. 10, and given the deadline for requesting reviews of extended treatment, the first review results are expected early next month. Insurers had forecast the effect on loss ratios would surface around year-end, factoring in the eight-week threshold and claims payment procedures, but the impact has come sooner.
Savings on future treatment costs, which insurers had paid without clear standards to reach early settlements with accident victims, are also expected to lower loss ratios. Revised standard policy terms apply to auto insurance contracts whose coverage begins on the 25th, under which patients with minor injuries receive payment for actual treatment costs rather than estimated future treatment costs. Future treatment payments to patients with minor injuries totaled 1.439 trillion won last year, up 7.1% from 1.343 trillion won in 2021, according to the Korea Insurance Development Institute. Such patients accounted for 85% of all future treatment payments, making the item a leading cause of claims leakage. The savings are expected to show up in insurers' earnings over a two-year lag.
KB Securities projects that loss ratios at major insurers including Samsung Fire & Marine Insurance, Hyundai Marine & Fire Insurance and DB Insurance will fall by a cumulative 3.1 percentage points over the next three years, helped by lower future treatment payments. LS Securities said the eight-week rule and the revision of the future treatment cost system would add 50 billion to 100 billion won to each major non-life insurer's auto insurance earnings. Including the effect of the managed-benefit scheme introduced in July, each company's insurance earnings could rise by about 150 billion won.
Auto insurance loss ratios have been improving even before the rule took full effect. The combined loss ratio at the four largest non-life insurers was 84.7% for the January-September period, down 0.76 percentage point from a year earlier and reversing an earlier increase, according to the General Insurance Association of Korea. Rainfall last month was one-ninth of the year-earlier level, and that seasonal factor combined with the eight-week rule and the future treatment cost revision is expected to push loss ratios down further.
A balloon effect is the main uncertainty. Patients with minor injuries who could end treatment early may instead use the full eight weeks or increase visits from two or three times a week to four or five, raising claims. Because injuries of grade 11 and above are classified as serious, diagnoses that push patients into higher injury grades could also increase. Rising hospitalizations of minor-injury patients at traditional Korean medicine hospitals would further limit the decline in loss ratios.
Non-life insurers are closely watching loss ratio trends from October through December. A sharp drop would substantially reduce pressure to raise rates when premiums are set for next year. "The specific impact of the eight-week rule on loss ratios will become clear from mid-November," an industry official said. "It could be a variable in future auto insurance rate decisions."