1. Structural Drivers Behind the Deterioration in Loss Ratios

The increase in the loss ratio reflects the combined effects of premium-related and claim-related factors.

• Premium factor (+2.4%p): The cumulative impact of motor insurance premium reductions implemented over the past several years contributed to an increase in the loss ratio by lowering the average premium per policy. As motor insurance policies are renewed on an annual basis, the effects of premium reductions are not reflected immediately but gradually weigh on the loss ratio over time. Meanwhile, growth in the number of insured vehicles provided only a marginal offset.
• Claim factor (+1.7%p): Rising claim payments resulting from accidents further contributed to the increase in the loss ratio.

2. Growth in Losses Concentrated in Property Coverage

The primary driver of the increase in claim costs has been property coverage (third-party property damage and own damage), which has expanded significantly more than bodily injury coverage.

As of the third quarter of 2025, property coverage contributed approximately +2.2%p to the loss ratio, while bodily injury coverage (third-party bodily injury and personal injury protection) accounted for only +0.4%p. The increasing share of high-end vehicles, including imported cars, electric vehicles, and hybrid vehicles, has led to higher parts and labor costs, resulting in rising repair expenses and a rapid growth of losses in property coverage.

3. Accident Severity as the Primary Concern

Although the number of traffic accidents has shown a long-term declining trend, the average claim payment per accident (accident severity) has continued to increase.

As of the third quarter of 2025, accident frequency contributed +0.5%p to the loss ratio, while accident severity contributed +1.0%p. In particular, average claim payments per accident under property coverage have risen markedly. Within bodily injury coverage, costs under BI II (including pain and suffering compensation, lost income, and caregiver expenses) have also continued to increase.

Certain compensation items, such as traditional medical treatment expenses and nursing care costs, have been rising at a pace exceeding the general inflation rate.

(Source: Financial Supervisory Service)

4. Outlook for Loss Ratios in 2025 and Policy Implications

Through the end of 2025, motor insurance loss ratios are likely to deteriorate further from first-half levels. Owing to the cumulative impact of premium reductions, the continued rise in repair and parts costs centered on property coverage, and increasing accident severity associated with the growing share of electric and imported vehicles, the combined ratio for motor insurance in 2025 is expected to exceed the break-even level, even if the expense ratio remains at its current level.

5. Policy and Institutional Challenges

To mitigate premium pressures going forward, institutional reforms, particularly in property coverage, appear increasingly necessary. Without structural improvements in areas such as repair cost assessment systems, parts pricing and labor cost structures, and loss management practices for high-value and technologically advanced vehicles, the medium- to long-term stabilization of motor insurance loss ratios is assessed to be difficult to achieve.

1. Strengthening Risk Management for Emerging Technologies and Industries

The expansion of liability insurance products is assessed as a measure to address emerging liability risks arising from new technologies, new industries, and community-based services, including the expansion of electric vehicle charging infrastructure, safety issues in electrical contracting, and the growth of caregiving services.

Against the backdrop of rising accident risks associated with electric vehicle charging facilities, demand for liability insurance to protect facility operators and service providers is expected to expand rapidly.

2. Advancing Climate Risk Insurance in Parallel

Alongside efforts to strengthen risk management for emerging technologies and industries, KIDI has also committed to supporting the enhancement of policy-driven insurance programs, including storm and flood insurance, earthquake insurance, crop disaster insurance, and agricultural and fisheries income protection insurance, in response to rising natural disaster risks associated with climate change.

3. Benchmarking the U.S. Liability Insurance Market

The KIDI analyzed the product structures, legal frameworks, and judicial precedents of the United States, the world’s largest liability insurance market, and presented category-specific measures to promote the development of Korea’s domestic liability insurance market. Key implications are as follows.

• Expansion of Coverage for Legal Defense Costs Under prevailing U.S. market practice, separate coverage limits are typically established for legal defense costs in addition to liability limits. As such, the KIDI assessed that demand is likely to increase in Korea for legal service insurance products or riders that provide coverage for legal expenses.
• Simplification of Commercial General Liability Insurance Structures While U.S. liability insurance policies generally provide comprehensive coverage for a wide range of industry risks under standard policy terms, Korean policies apply numerous special clauses tailored to specific industries and risks. KIDI emphasized the need to simplify and standardize product structures, taking into account the level of insurance literacy in the domestic market.
• Expansion Potential of Cyber Liability Insurance In the U.S. market, cyber liability insurance is often offered in combination with security consulting services, whereas in Korea, sales remain largely centered on mandatory insurance products. KIDI pointed out the need to promote comprehensive insurance products that combine various coverages, including business interruption losses.

4. Implications

These policy directions suggest that Korea’s liability insurance market may represent a turning point, evolving beyond a model centered primarily on mandatory insurance toward a comprehensive risk management framework encompassing emerging industries, climate-related risks, and legal exposures.

1. Product Design Standards for Fifth-Generation Medical Expense Insurance

Medical expense insurance has played a key role as a form of private health insurance for the public. However, it has continued to face structural challenges, including the inducement of excessive medical utilization and rapid premium increases. Accordingly, the new framework aims to transition toward appropriately structured products focused on universal coverage and high-cost, severe medical expenses.

First, for outpatient services covered under the National Health Insurance system, the policyholder copayment rate will be linked to that of the National Health Insurance, thereby enhancing the policy effectiveness of the public health insurance cost-sharing framework. For inpatient services covered under National Health Insurance, which are largely associated with severe illnesses and present relatively low risks of overutilization, the copayment rate will be maintained at 20%, consistent with the current fourth-generation framework.

With respect to non-covered medical expenses, riders will be structured by distinguishing between severe and non-severe cases. Coverage for severe non-covered medical expenses will be strengthened, while coverage for non-severe non-covered medical expenses will be scaled back, in order to curb incentives for excessive use of medical services.

Note: Cosmetic/aesthetic treatments + unverified new medical technologies, cosmetic procedures, injections

2. Strengthening Accountability of Sales Channels

In response to the growing market influence of corporate insurance agencies (GAs) and corporate insurance brokers, measures will be introduced to reinforce internal controls and accountability.

As the separation between manufacturing and distribution in Korea’s insurance market has accelerated, corporate insurance agencies (hereinafter referred to as “GAs”) have emerged as the largest sales channel. While GAs have played a positive role in enhancing consumer choice, persistent concerns have been raised regarding adverse effects, including mis-selling and the abuse of dominant market positions.

Reflecting these concerns, the proposed amendments introduce multi-faceted measures to strengthen accountability across insurance sales channels, including: (i) the establishment of internal control systems, (ii) enhanced effectiveness of sanctions, and (iii) expanded information disclosure.

First, supervisory and management frameworks for GA headquarters and their branches will be established, together with detailed procedures to ensure compliance with internal control standards. To strengthen GAs’ capacity to meet liability obligations, the level of security deposits will be raised on a differentiated basis according to scale. In addition, the transfer of contracts for the purpose of avoiding regulatory sanctions will be prohibited, thereby promoting sound business practices among sales channels. Disclosure of insurance agents’ information provided directly to consumers through application forms and insurance policies will be expanded to include contract retention ratios.

Furthermore, for corporate insurance brokers, whose market presence has recently expanded, particularly in the non-life insurance segment, detailed internal control guidelines will be established. Disclosure requirements will also be expanded by applying standards used for large GAs, thereby addressing potential supervisory blind spots.

3. Introduction of Core Capital Regulation

A core capital solvency ratio will be introduced as a mandatory prudential standard, encouraging more proactive capital management by insurers.

Core capital, which represents the most loss-absorbing component of insurers’ available capital, has historically been used as a sub-indicator in management assessments. However, following the implementation of the new solvency regime (K-ICS) in 2023, insurers have increasingly relied on the issuance of subordinated debt for capital management, while relatively less attention has been paid to managing core capital ratios.

In response, a two-track reform framework has been established, combining the relaxation of certain K-ICS regulatory requirements, including conditions for the early redemption of subordinated debt (as reflected in the revised Supervisory Regulations in June 2025), with the introduction of core capital ratios as mandatory compliance standards. The current amendments are being pursued as follow-up measures under this framework.

4. Implementation Schedule

The legislative and regulatory notice period will run from January 15 to February 25, 2026. Following the completion of the relevant procedures, the authorities aim to finalize the amendments in the first half of 2026.