The Impact of the COVID-19 Pandemic on Motor Insurance
The COVID-19 pandemic has influenced almost every sector of the economy, and the motor insurance market had its share of the impact. In terms of loss ratios, the impact on motor insurance appears to be pretty much favorable. Indeed, insurance companies providing auto insurance coverage benefited from the pandemic because less driving meant fewer accidents and insurance claims.
Between January and September 2021, the motor insurance loss ratio in Korea was 79.4%, down 5.6%p compared to the same period of the previous year. The incidence rate of motor insurance claims has sharply dropped since 2020 when the coronavirus pandemic started in full swing in Korea. The incidence rate of bodily injury liability claims fell from 5.6% in 2019 to 5.1% in 2020 and 5.o% in the first half of 2021. The frequency of property damage liability claims, which had been already going down for many years, declined to 11.8% in 2020 from 13.4% in 2019, and the rate further decreased to 11.3% in the first half of 2021.
(Sources: Korea Insurance Research Institute, Korea Insurance Development Institute)
However, the severity of motor insurance claims has been growing due to an increase in the number of high-priced imported cars and rising medical costs. Insurance payouts for third-party property damage per claim jumped by 9.1% year on year to KRW 1.73 million in 2020, while third-party bodily injury benefits per claim amounted to KRW 4.42 million in 2020, up 11% from a year earlier.
The increase in the severity of third-party property damage claims has been accelerated by rising inflation, pandemic-driven supply chain disruptions, surging sales of expensive imported cars, and high repair costs involving such luxury cars. In 2020, sales of imported cars shot up by 15.9% to 286,685 vehicles, according to the Korea Automobile Importers and Distributors Association (KAIDA). The sales growth reflected pent-up demand as some of the unhappy realities of the pandemic were putting homebound rich Koreans in a buying mood.
Looking ahead, claims frequency will rebound, but inflationary pressure and supply chain issues are bound to keep claims severity high. With eased social distancing measures, more cars are likely to be on the roads compared to the early days of the pandemic, and the frequency of motor claims may return to pre-pandemic levels soon. The trend of rising insurance payouts per claim had long been underway due to moral hazard and dishonest behavior related to third-party bodily injury claims, and the pandemic-induced shortages of car chips are poised to put more upward pressure on claims severity.