Do High-Risk and Drunk Drivers Purchase More Coverage? : Evidence of Adverse Selection and Moral Hazard in the Korean Auto Insurance Market

This study analyzes adverse selection and moral hazard problems in the Korean auto insurance market, where regulation is tight, policy forms are standardized, and all insurers share policyholders’ experiences. Our dataset considers risk heterogeneity: standard drivers; drunk-drivers; high-risk drivers. In addition, we merged the data with the ‘long-term driver insurance’ information they purchased. Using a general regression and logistic regression we verify a weak adverse-selection problem under the current auto insurance scheme, while adverse-selection problem exists prudently where no underwriting is required. Our results show that an insured who caused auto accident is prone to purchase additional insurance products and vice-versa. In this market, we have both ex-ante and ex-post moral hazard problems, too. Thus we need to revise deductible system and introduce underwriting factors to the long-term drivers insurance to curb these moral hazards problems and to protect bona fide customers.