The Main Causes of Auto Insurance Loss Ratios: 'Repair Costs and Korean Medicine Treatment Fees'... Insurers Say "Premium Increases Are Inevitable"

Temporarily Halted at Authorities' Request, but Insurers Say "No Choice Due to Worsening Loss Ratio"
Sharp Rise in Parts Costs, Which Account for Half of Repair Expenses, and Surge in Oriental Medicine Treatment Fees Including Physical Therapy

[Asia Economy Reporter Oh Hyung-gil] The planned increase in car insurance premiums, initially scheduled for the end of this month, has been put on hold. After financial authorities requested a suspension, property and casualty insurers, who had been hesitant, ultimately decided to temporarily halt the hike. The property insurance industry, which is complaining about deteriorating profitability due to soaring loss ratios (the ratio of paid claims to received premiums), insists that there is no solution other than raising premiums.

The industry argues that due to the complex interests surrounding car insurance, raising premiums is inevitable to reduce the loss ratio. However, there are also criticisms that the cost burden is being passed directly onto consumers, especially since premiums were raised twice last year.

On the 10th, an executive from a major property insurer lamented, "How great it would be if there were a way to reduce the loss ratio without raising car insurance premiums," adding, "Since increases in car repair costs and medical expenses affect the car insurance loss ratio, it is unavoidable."

The main causes of rising repair costs are parts prices and labor charges. In 2018, of the 5.6761 trillion KRW spent on repairs under car insurance, parts costs accounted for nearly 50%, but lowering these costs is practically impossible.

The government has introduced a substitute parts certification system since 2015 and encouraged the use of alternative parts to reduce parts costs. Insurers have also offered special contracts that refund premiums if substitute parts are used during repairs.

However, the use of substitute parts has stalled due to disagreements with automakers and parts manufacturers. The underlying issue is that finished car companies register design rights for parts and have established a structure for exclusive distribution.

During the 19th National Assembly, Min Byung-doo, a member of the Democratic Party of Korea, proposed amendments to the Automobile Substitute Parts Act and the Design Protection Act to promote substitute parts, but these efforts ultimately failed. Negative consumer perceptions of substitute parts also play a role.

An insurance industry official said, "There is a strong perception that genuine parts from the car manufacturer must be used when replacing parts," and added, "Which consumer would welcome a repair shop using substitute parts?" In the United States, the introduction of a substitute parts certification system led to substitute parts being sold at up to about 75% of the price of genuine parts, and the price of genuine parts also dropped by 30%.

Medical expenses under car insurance are also a factor increasing the loss ratio. In particular, controversies over excessive treatment of car insurance patients by Korean medicine clinics and Korean medicine hospitals (the Korean medicine community) have been ongoing.

In the first half of last year, out of 1.0446 trillion KRW in car insurance medical expenses, 428.8 billion KRW (41%) was spent on Korean medicine treatments. This is about double the 23% recorded in 2015. The property insurance industry believes that excessive treatments such as Chuna therapy and herbal medicine at Korean medicine clinics have increased, causing a sharp rise in car insurance Korean medicine medical expenses.

Korean medicine medical expenses nearly doubled from 357.6 billion KRW in 2015 to 713.9 billion KRW in 2018, while Western medicine medical expenses increased only by 70 billion KRW, from 1.1981 trillion KRW to 1.2623 trillion KRW, showing a significant difference.

The Korean medicine community counters that Korean medicine treatments, which have strengths in treating aftereffects of traffic accidents and non-surgical treatments, are gaining recognition from consumers. They also argue that the psychology of accident victims, who believe they should receive proper treatment even for minor traffic accidents, plays a role.

An insurance industry official pointed out, "Not all treatments received after an accident can be seen as excessive treatment or moral hazard," but added, "If medical expenses increase, ultimately the other policyholders will have to bear the burden."

This content was produced with the assistance of AI translation services.