Rationalization of Repair Costs

According to sources in the financial industry on September 15, the government has decided to improve transparency in auto repair expenses by supporting revision of the related laws.  

The Ministry of Land, Infrastructure, and Transport (MLIT), the Financial Services Commission (FSC), and the Financial Supervisory Service (FSS) agreed to support parts of amendments for the Automobile Management Act and Passenger Transport Business Act put forward by Rep. MinByeong–doo, chief director of strategy and public relations for the Democratic United Party.

The government’s push to slash repair costs for foreign cars appears to be gathering further momentum as witnessed by prosecutors’ recent launch of a search and seizure operation against import car dealerships suspected of inflating repair and maintenance expenses.

A government official said, “There is a general consensus among ministries concerned about controlling excessive repair expenses for imported vehicles. Related government departments are also supporting the revised bills,” adding, “Foreign car dealers and service centers are unable to react against the proposed bills as strongly as they used to."

The main point of the amendments is to make the provision of information on auto parts obligatory, thereby preventing service centers from inflating repair expenses.

If those amendments pass, customers will be notified of details on hourly wages for repair items, and duration of repair work, and the cost, quantity, manufacturer, and serial number of auto parts.

With the revised bill, auto part costs can be reduced using certified replacement parts, instead of original auto parts. The business of auto body repair shops for minor repairs will also be limited to stop those shops from producing bogus estimates. 

So far, objective assessment of repair expenses for foreign cars has been very difficult, since estimates only show the content of repair work, names of auto parts, and labor rates. In addition, the identification of second-hand parts has been a nearly impossible task. 

Moreover, the average repair costs in the 2012 fiscal year (FY) were 2.33 million won (US$2,152.92) for imported vehicles, 4.3 times higher than those for domestic cars (54,000 won, US$49.90). 

In FY 2012,the average insurance payouts in an auto accident were 2.965 million won (US$2,739.66) for foreign cars, and 1.004 million won (US$927.70) for domestic. Among imported vehicles, owners of Mercedes-Benz vehicles on average paid 4.154 million won (US$3,838.30), and those owning Audi cars paid 4.072 million won (US$3,762.53). Fiscal year 2010-2012 saw a 1.9% increase in the insurance paid for Korean cars, but a 25.5% rise for foreign ones.

The regulations for car rental prices will also be strengthened. A measure to prohibit service centers from offering rebates to rental car companies is under consideration. Violators would face a fine of up to 20 million won (US$18,480.02) or a maximum prison sentence of 2 years. 

In fiscal year 2012, the average rental costs after the accident were 1.196 million won (US$1,105.11) for imported vehicles, 3.6 times higher than those for domestic cars (332,000 won, US$306.77). In particular, 800,000 to 900,000 won (US$739.20–831.60) is needed to rent the BMW750 for a day or two. There are a lot of cases where rental costs are more expensive than repair expenses. 

However, it has been pointed out that a high loss ratio for import vehicles is not reflected in insurance premiums. In fiscal year 2012, the loss ratio for foreign cars was 81%, much higher than that for Korean cars (65.2%). 

Therefore, FSS is accelerating work to remedy problems in setting insurance premiums for foreign cars. 

Currently, the Korea Insurance Development Institute (KIDI) is working on compiling statistics about loss ratios depending on vehicle types, after receiving data for imported vehicles in the 2012 fiscal year from insurance companies such as Samsung Fire & Marine Insurance, Dongbu Insurance, and Hyundai Marine & Fire Insurance. 

FSS predicts that insurance premiums for foreign cars will be increased after KIDI finishes the work. 

FSC is also conducting a comprehensive review of the related system, since it reached the conclusion that there are general problems with repair expenses and insurance premiums for imported vehicles.

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