Due to Inflation... Inevitable Increase in Auto Insurance Loss Ratios

Vehicle Repair Cost Increase Outpaces Inflation
Rising Labor Costs Due to Minimum Wage Hike↑
Impact Continues Even if Inflation Stops... Loss Ratio Expected to Rise

New Cars Spill from Transport Vehicle Slipping on Snowy Road
(Seocheon=Yonhap News) Reporter Kang Suhwan = On the 22nd at 9:27 a.m., when a heavy snow warning was issued in Seocheon, Chungnam, a transport vehicle slipped on a snowy road near Seocheon Rest Area on the Seohaean Expressway heading toward Mokpo, overturned sideways, and the new cars it was carrying spilled onto the road. No one was injured in this accident, and the police are investigating the detailed cause of the accident. 2022.12.22 [Photo provided by reader Song Younghoon. Redistribution and DB prohibited]

[Asia Economy Reporter Minwoo Lee] As inflation continues, labor costs are also rising, leading to a greater increase in vehicle repair costs. Ultimately, it is inevitable that the loss ratio of auto insurance will rise, according to an analysis.

Repair Costs Rising Faster Than Inflation

On the 25th, the Korea Insurance Research Institute released a report titled 'Inflation and Auto Insurance Loss Ratio,' analyzing this trend. According to the report, the per-incident vehicle repair cost in the third quarter of last year increased by 2.8% compared to the same period the previous year, but in the third quarter of this year, it rose by 6.5%, more than doubling. This gap widened more significantly than the consumer price inflation rate, which increased from 2.5% to 5.9% during the same period.

The growth rate of vehicle repair costs has exceeded the consumer price inflation rate since 2012. From the first quarter of 2012 to the third quarter of this year, there were only two quarters?third quarter of 2013 and second quarter of 2014?when the per-incident vehicle repair cost growth rate was lower than the consumer price inflation rate.

Specifically, over the past 10 years, parts costs accounted for the largest share of vehicle repair costs at 58%, followed by labor costs (29%) and painting costs (13%). Considering that about 60% of painting revenue is labor-related, labor costs, including wages, represent the second largest portion after parts costs. The parts cost growth rate increased by 5 percentage points from 2.8% in the third quarter of last year to 7.8% in the third quarter of this year. During the same period, labor and painting cost growth rates rose by 3.1 percentage points and 1.9 percentage points, respectively. Labor costs, in particular, may be more affected by inflation as they encompass wages and capital costs necessary for operating repair shops.

Inflation Impact to Persist for a While... Loss Ratio Increase Inevitable

As vehicle repair costs rise due to inflation, the increase in auto insurance loss ratios is expected to accelerate. The loss ratio is the ratio of insurance claims paid by insurers to the total premiums received from policyholders. Typically, a loss ratio in the low 80% range is considered the breakeven point for auto insurance.

According to the Korea Insurance Development Institute, vehicle repair costs amounted to 6.572 trillion KRW last year (3.8466 trillion KRW for third-party liability coverage and 2.7254 trillion KRW for own damage coverage), accounting for 43% of the total loss amount of 15.2 trillion KRW. The increase in painting and labor costs per repair due to inflation is analyzed to potentially lead to an expansion in vehicle repair cost growth and a rise in loss ratios. Although the parts cost growth rate has been increasing since last year, it has not exceeded 11% annually, whereas the labor cost growth rate had already reached up to 12% around 2019.

Even if inflation slows down next year, its effects tend to persist for 2 to 3 years, so vehicle repair costs are expected to continue rising steadily. Jeonyongsik, a senior research fellow at the Korea Insurance Research Institute, explained, "To compensate for the real reduction in claim amounts caused by inflation, nominal claim amounts may increase, which could further widen the loss ratio. Since adjusting auto insurance premiums is not easy and the relationship between loss ratio and premium adjustment is asymmetric, the impact of inflation could be even greater."