Why Insurance Companies Can't Smile Despite the Drop in Auto Insurance Loss Ratios

On July 12, the first day of the enforcement of the amended Road Traffic Act strengthening pedestrian protection obligations such as stopping temporarily in front of crosswalks, a right-turning vehicle is stopped on a road near Seoul Station. Photo by Moon Honam munonam@

[Asia Economy Reporter Changhwan Lee] This year, the loss ratio for automobile insurance has improved compared to last year. Despite the easing of COVID-19 social distancing measures, the improvement in the automobile insurance loss ratio is attributed to factors such as soaring oil prices and stricter traffic regulations. Although there is a higher likelihood of automobile insurance recording a surplus again this year following last year, insurance companies are also expressing concerns about increased pressure to reduce automobile insurance premiums.

According to the non-life insurance industry on the 1st, the average automobile insurance loss ratio for the first half of this year among 11 major domestic non-life insurers was 80.7%, down 2 percentage points from 82.7% during the same period last year.

Insurers believe that maintaining the automobile insurance loss ratio in the low 80% range can still yield profits. Last year’s overall average loss ratio was 85.4%, yet the insurance industry posted a surplus of about 400 billion KRW from automobile insurance.

Due to the reduction in vehicle operation and accidents caused by the spread of COVID-19, the industry succeeded in turning a profit for the first time in four years. In the first half of this year, the loss ratio further decreased compared to last year, increasing the likelihood of a surplus for the second consecutive year. In particular, large non-life insurers such as Samsung Fire & Marine Insurance, Hyundai Marine & Fire Insurance, DB Insurance, Hanwha General Insurance, Meritz Fire & Marine Insurance, and KB Insurance maintained automobile insurance loss ratios in the 60% to 70% range in June, suggesting the possibility of an even larger surplus.

Despite the easing of social distancing as the number of COVID-19 cases declined this year, the improvement in the loss ratio is understood to be due to several reasons.

First, the sustained high oil prices have led to a decrease in vehicle operation, which is considered a major cause. According to the Korea Expressway Corporation, highway traffic volume in June was 255,978 vehicles, about 7% lower than 275,132 vehicles in the previous month. With fuel prices exceeding 2,000 KRW per liter, the reduction in vehicle operation and accident numbers has contributed to some improvement in the loss ratio.

There is also an opinion that the strengthening of traffic laws has reduced the number of accidents and improved the loss ratio. The government’s amendment to the Road Traffic Act, which significantly strengthens drivers’ obligations to protect pedestrians in school zones and crosswalks, is believed to have led to a decrease in accidents.

Researcher Hyejin Park of Daishin Securities explained, "Looking at recent trends, although the number of registered vehicles and traffic volume are increasing, the number of accidents involving deaths and injuries is decreasing. The so-called Min-sik Act and the Safety Speed 5030 regulations have expanded the scope of violations, which has contributed to the reduction in accident rates."

Additionally, the recent years’ trend toward higher-end vehicles and increased electronic components is also presumed to have influenced the decrease in accident rates. This trend raises vehicle prices, which in turn leads to higher insurance premiums per vehicle, helping improve the loss ratio.

Although automobile insurance, which had caused losses for insurers every year, is turning into a cash cow, the mood among insurers is not optimistic. This is because the decrease in the loss ratio may be temporary, and there is growing pressure to reduce automobile insurance premiums.

Non-life insurers that succeeded in turning a profit in automobile insurance last year have reduced automobile insurance premiums by about 1% this year. If the surplus grows this year, there is a possibility that financial authorities will increase pressure to lower automobile insurance premiums.

An industry insider said, "Although the automobile insurance loss ratio was not bad in the first half, it is uncertain whether this trend will continue into the second half. Due to increased travel during the vacation season, the number of accidents has risen since July, and factors such as flood damage from the rainy season and rising automobile parts costs due to inflation may cause the loss ratio to increase in the second half."

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