Review Comments on the Partial Amendment to the Automobile Accident Compensation Security Act

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2003.06.24

No. 02

I. Focus of the Amendment and Its Purpose

The proposed amendment to the Automobile Accident Compensation Security Act contains a number of provisions, but this review is limited to the following matters.

First, the amendment would introduce “Standards for Automobile Insurance Repair Fees” in the form of a public notice issued by the Minister of Construction and Transportation (proposed Article 19-2(1)); second, it would establish an Automobile Insurance Repair Fee Deliberation Committee to deliberate on the fee standards (proposed Article 19-3). The committee would consist of a total of 18 members: 6 recommended by insurers, 6 recommended by repair businesses, and 6 recommended by civic groups or consumer organizations. The chairperson would be elected from among the members recommended by civic groups, etc., and adoption of the repair fee standards would require the approval of at least 4 members recommended by civic groups or consumer organizations.

Two reasons are presented for the amendment. First, it is intended to ensure appropriate repair of accident vehicles (first sentence of proposed Article 19-2(1)); second, it is intended to prevent disputes over repair charges (first sentence of proposed Article 19-2(1)). With respect to disputes over repair charges, the proposal presupposes the superior bargaining position of insurers.

II. Issues and Review

1. The validity of introducing fee standards through a public notice

1.1. Practice to date

Until now, automobile insurance repair fees have been determined autonomously through agreements reached by individual bargaining between each insurer and repair business. Instead of such autonomous price formation through market functions, the amendment would present a uniform price standard in the form of a public notice issued by the Ministry of Construction and Transportation.

1.2. Problems with price regulation

The “Standards for Automobile Repair Fees” under the amendment constitute an unusual type of price regulation. As Korea has shifted the basic direction of economic management from government-led to private-led growth (deregulation and liberalization), the state has made legislative and administrative efforts to abolish various administrative regulations, especially price controls (abolition and revision of competition-restricting statutes, regulatory reform task forces and committees, reducing regulations by 50%, introduction of the sunset rule, etc.). In other words, introducing a public-notice system for repair fee standards through amendment of the Automobile Accident Compensation Security Act runs counter to the trend of deregulation, marketization, and regulatory reform, unlike the legislative efforts undertaken by the National Assembly up to now.

Ordinarily, price regulation means that the government calculates appropriate rates and directly controls excessive price increases in industries where natural monopoly or market failure is expected. By contrast, under this amendment, the government, represented by the Ministry of Construction and Transportation, would not play the role of an active coordinator, but would instead passively publish matters decided by the deliberation committee. Regulation of repair fee standards differs from ordinary examples of price regulation.

1.3. Characteristics similar to a price cartel

If representatives of insurers’ or repair businesses’ interests participate in establishing repair fee standards, and these are then formalized through a public notice, with the General Insurance Association or the National Federation of Repair Associations involved, this could be evaluated as a price cartel regulated by the Monopoly Regulation and Fair Trade Act.

Of course, introducing a price-agreement regime grounded in law through amendment of the Automobile Accident Compensation Security Act would constitute a kind of statutory cartel, and under Article 58 of the current Monopoly Regulation and Fair Trade Act, its illegality would be excluded as a legitimate act pursuant to law, thereby granting it formal legality.

However, a price-agreement regime not only runs counter to free competition, but is also subject to strong regulation internationally. In accordance with the OECD’s Recommendation Concerning Effective Action Against Hard Core Cartels of 1998.4.18., Korea also enacted the “Act on the Maintenance of Improper Concerted Acts” in 1999, abolishing in one stroke many statutory cartels based on 18 different statutes, such as fee standards for attorneys and certified public accountants.

3. Whether insurers have a superior bargaining position under the Monopoly Regulation and Fair Trade Act

The superior position of insurers discussed in the legislative rationale appears to refer not to market-dominant position, but to the superior bargaining position referred to in relation to unfair trade practices (Article 23(1)4 of the Monopoly Regulation and Fair Trade Act). The “position in transactions” under Article 23(1)4 does not mean a position as strong as market dominance, but at minimum is a broad concept referring to the ability to exert considerable influence over the counterparty’s transactional activities.

Repair businesses generally want continuing transactions with insurers, and in terms of economic scale and the level of mobilizable manpower and expertise, insurers hold a relative advantage over repair businesses in the ordinary sense.

However, as a general practice, it is the driver or the towing company, not the insurer, that selects the repair business, and where repair businesses are dissatisfied with the insurer’s repair fee standard, they may demand direct payment from the driver. In light of these points, even if insurers in certain cases hold a de facto superior position, such as by withdrawing vehicles, it is difficult to conclude immediately that this constitutes the “position in transactions” or superior bargaining position recognized by the Fair Trade Commission.

Moreover, even if an insurer’s superior bargaining position vis-à-vis repair businesses is recognized, the insurer’s business conduct in relation to payment of repair fees must also be found “unfair” to become subject to regulation. If an insurer unfairly abuses a superior bargaining position, it becomes subject to corrective measures by the Fair Trade Commission and supervisory measures by the Financial Supervisory Service.

A review of Fair Trade Commission decisions reveals almost no cases involving insurers’ abuse of superior bargaining position against repair businesses; rather, cases showing the opposite can be found.

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4. The public-notice system and the welfare of insurance consumers

The legislative rationale for the amendment states that the public-notice system for repair fee standards is intended to prevent disputes between insurers and repair businesses and to increase the welfare of insurance consumers.

Once such a system is introduced, it may in the short term suppress individual disputes between insurers and repair businesses and contribute to bringing fee standards into line with reality or making them more appropriate. However, introducing the public-notice system presupposes large-scale negotiations between the insurance industry and the repair industry over setting the fee standards, and these negotiations may be repeated annually over revisions reflecting inflation or increases in labor costs. Such demands may, of course, develop into collective disputes directed at the government.

The core of introducing the public-notice system lies in what the repair industry calls the normalization or appropriateness of repair fees. If repair fees rise, an increase in insurance consumers’ welfare can be expected in connection with the repair of accident-damaged vehicles. However, consumers’ fundamental welfare is related to insurance premium expenditures. An increase in repair fees leads to an increase in insurance payouts, and insurers will then pass this on to insurance consumers.

In particular, if a rigid fee-standard system is introduced, and negotiations take place within the framework of the public-notice system rather than through bargaining between individual parties, the bargaining power of the repair industry will increase. If the system shifts from competition to a statutory pricing regime, this will become the greatest factor driving fee increases. It is generally demonstrated in competition law that a public-notice system for fee standards, that is, price regulation, harms consumer welfare in the long term.

III. Conclusion

1. Overall evaluation of the price public-notice system

The medical profession is a field with a nonprofit or public-interest character, governed by medical ethics, and traditionally has not been classified as a market. In the medical field, so-called professional law has applied, while the application of competition law has been limited. By contrast, the automobile repair market has thus far been a commercial field governed by market functions; with the transition from a licensing system to a registration system, it is a for-profit market in which entry and exit are free. Unlike in the medical field, this is the fundamental reason why a public-notice system for repair fee standards in the automobile repair market does not sit naturally with the general public.

A binding price public-notice system fundamentally eliminates the room for competition between insurers and repair businesses. Repair businesses lose the incentive to lower repair charges through efficient repairs, and insurers lose the incentive to find good repair businesses in order to reduce insurance payouts. In such a case, lobbying and solicitations directed at insurers are likely to replace competition based on price and service, and smaller repair businesses with weaker lobbying capacity are likely to be disadvantaged.

In short, the introduction of a public-notice system for repair fees is a type of price regulation. It runs counter to the broader trend of regulatory reform and conflicts with a series of legislative trends in the National Assembly since the 1990s. In addition, this proposal may also become subject to controversy regarding constitutional compatibility, including issues of proportionality and the legitimacy of the means in relation to the legislative purpose.

2. Market-compatible alternatives

Dissatisfaction within the repair industry over repair fees has accumulated, and has at times erupted in the form of collective demonstrations. It is repeatedly argued that current repair fees for insured vehicles are markedly lower than the after-sales service fee standards of Hyundai, Kia, or Daewoo Motor, and that although there were partial upward adjustments to repair fees after 1996, the reduction in estimated repair hours meant there was no real increase in labor charges. In light of these circumstances in the repair industry and the difficulties of real-world politics, it is possible to consider regulatory alternatives that are as market-compatible as possible and face less legislative resistance, instead of a binding price public-notice system.

The first alternative is to introduce into the Automobile Accident Compensation Security Act itself a recommended price standard with a certain range. Unlike medical insurance fees, automobile repair charges should be determined by market functions, so a nonbinding recommended price system is desirable. Also, instead of presenting a uniform and rigid fee standard, it is important to set a reasonably broad price range so that price competition can occur within that range. Of course, through administrative guidance by the competent authority, care should be taken to avoid uniform price formation at the lower end of the range.

The second alternative is to introduce repair fee standards through an inter-insurer agreement. Such fee standards would constitute a price cartel in violation of the Monopoly Regulation and Fair Trade Act, but if approved by the Financial Supervisory Commission pursuant to Article 17 of the current Insurance Business Act, their illegality would be excluded. As a mechanism available under current law, this could be invoked without amending the Automobile Accident Compensation Security Act, but this option would amount to introducing a kind of price cartel, so it not only runs counter to the 1998 OECD recommendation, but also faces the practical problem that the Financial Supervisory Commission does not approve such cartels.

Hoyeol Jeong (Professor, College of Law, Sungkyunkwan University)

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1998.1.30., Fair Trade Commission Resolution No. 98-22.

Wiki:

https://www.cfe.org/w/bbsDetail.php?idx=63

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Original title: 자동차손해배상보장법중개정법률안에 대한 검토의견

Author: Ho-yeol Jeong

Date: 2003-06-23

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=bill&pn=4&idx=25820