Susanna Gotsch is lead analyst at CCC Information Services Inc. and the author of its Crash Course Report series.
The insurance industry has seen a significant increase in both the frequency and cost of total loss claims over the last several years. This article will explore what’s behind these trends and discuss what to expect in the next 18 to 24 months.
Older Vehicle Fleet Leads to Higher Total Loss Frequency
Over the last decade, total loss frequency has increased while overall claim frequency rate has declined. In 2000, about 9 percent of all vehicles for which an appraisal was written were flagged as a total loss; for the rolling 12 months ended June 2013, this number had grown to 14.24 percent (taking into account obvious totals where no appraisal is written, the industry-wide total loss percentage trends about 3 to 4 percent higher [14 percent in 2000 to nearly 19 percent]).[i] Essentially, this equates to a 5-percent total loss frequency increase over the last decade.
Why has total loss frequency increased? The single largest factor driving increased frequency has been an aging fleet. According to RL Polk, the average age of the U.S. fleet is 11.4 years.[ii] According to CCC’s Crash Course 2013, there has been only moderate variability within each vehicle age group of the percent flagged total losses. However, older vehicles have higher total loss frequency, and the age of vehicles appraised has also grown. In 2003, 27 percent of all repairable appraisals were for vehicles aged 7-years-plus; by mid-year 2013 this grew to 44.2 percent.[iii]
Experian estimates that 80.4 percent of light duty vehicles registered in the U.S. are 15 years old or less.[iv] That leaves about 20 percent of the vehicle population that would potentially be candidates for vehicle scrappage under normal circumstances (analysis of historical vehicle scrappage data reveals most vehicles are scrapped 13 to 18 years after production[v]). These same vehicles are also most likely to be totaled when involved in an auto claim, and until many of these older model year vehicles work their way out of the U.S. fleet, the industry will continue to see elevated total loss frequency in the coming years.
Drop in Sales Drove Up Vehicle Age and Used Vehicle Prices
In the decade ending calendar year 2007, the U.S. saw annual new vehicle sales average 16.7 million units per year.[vi] Sales plummeted in 2008 and 2009, then in 2010 forward began to see solid increases. New vehicle sales are expected to grow further in 2013 to nearly 15.6 million, yet the U.S. market is still selling approximately 1 million fewer new vehicles annually than the ten year average ending 2007.
This drop-off in sales led to a disruption in the supply of used vehicles available in the market. With typically 60 percent of all new vehicle sales historically including a trade-in, the drop-off in new sales alone meant at least 12.5 million fewer vehicles entered the market as used inventory between 2008 and 2012.[vii] Fleet companies and rental fleets also replaced fewer vehicles during this period, adding to the overall smaller inventory of used vehicles in the U.S. market. Yet while used vehicle supply was falling, demand was still high as it typically is during recessionary periods. In 2009 the ratio of used vehicle sales to new vehicle sales jumped to 3.4 versus the ratio of 2.5 for the prior ten year period[viii], as consumers that were able to purchase a vehicle opted for used versus new. Other external factors beyond the reduced supply were also instrumental in driving up used vehicle prices in the last several years. The federal cash-for-clunkers program in the summer of 2009 took about 750,000 used vehicles out of the market. Soaring gas prices in 2008 and again in 2011 drove demand for fuel-efficient vehicles. In addition, the disruption of new vehicle production resulting from the 3/11/2011 earthquake and tsunami in Japan led to a surge in demand for used vehicles from dealers racing to get vehicles to fill their lots. Subsequently soaring demand at a time of tight inventory led to higher used vehicle prices. Wholesale used vehicle price data from Manheim and ADESA shows used vehicle prices rose between 25 and 30 percent from late 2008 to 2012.[ix]
Improved availability of auto financing continues to be a key factor driving sales in 2013 for both prime and subprime buyers. After dropping off sharply during the recession, loan approval rates for prime, near-prime and subprime all rose. Data from Experian Automotive comparing the share of auto loans with credit outside of prime shows strong growth in the last year.[x] With nearly 60 percent of used vehicle sales with auto loans made to subprime buyers, demand for used vehicles in the $8,000 to $11,000 range has also grown. Historically, vehicles within this price range have been the strongest segment for subprime buyers.[xi]
Wholesale Used Vehicle Prices Temper
Key factors that will drive down used vehicle prices are improved supply or significantly lower demand. So far in 2013, the marketplace has seen an increased supply of used vehicle inventory from rental companies, lease returns, trade-ins and repossessions[xii]. This increase in supply is now helping to ease wholesale used vehicle values down. Manheim and ADESA both report moderate declines in used vehicle prices so far in;[xiii] however, average wholesale prices are still up nearly 20 percent from their low-point in late 2008.
Through June 2013, the supply of wholesale units of vehicle ages between 1 and 4 years increased 7.7 percent, helping to drive down wholesale prices 1.6 percent. Conversely, supply of wholesale units of ages 5 to 8 years fell 17.7 percent pushing their wholesale prices up nearly 1 percent.[xiv] Because many wholesale used vehicles are newer model year vehicles, softening prices among newer models has a larger impact on overall wholesale price measured by the auction firms.
Slowdown in Rising Total Loss Values
While the dynamics that occur in the marketplace in terms of wholesale and retail used vehicle prices certainly impact the costs incurred for total loss claims, there is an important distinction that must be considered. Many of the broader automotive industry indices that look at wholesale or retail used vehicle price data focus predominantly on vehicles that are aged seven years and younger. Total loss vehicle costs, however, are driven by a much different mix of vehicles – 74.8 percent of all total loss vehicles are aged seven years and older at mid-year 2013. The chart below illustrates the difference in vehicle mix by age of wholesale used vehicles sold at auction versus vehicles valued as total losses by CCC.
Analysts in the used marketplace often refer to a ‘waterfall’ pricing effect for used vehicles: when prices of new vehicles trickle down to drive prices for used vehicles. At the same time, the oldest vehicles, which are always in high demand due to availability and price stability, create a reverse waterfall or the low point from which all other used vehicle pricing also is determined. So while newer model year used vehicle prices are expected to see some further tapering in 2013, as inventories from lease returns and rental-company trade-ins begin to rise, the market may see continued firm pricing for older model-year vehicles, which ultimately sets the basement for used vehicle pricing. And although the supply of the older model year used vehicles may see some moderate lifts as consumers trade-in older model year vehicles, continued growth of subprime loan approval rates may drive demand for older, less expensive vehicles and may keep their prices elevated through 2013.
Subsequently, while the average total loss vehicle value has begun to taper, the industry will likely close out the year with total loss costs up moderately. Through mid-August 2013, total loss vehicle values are up only 1.2 percent, versus nearly 6 percent each of two years prior.
Assuming no major market disruptions, CCC anticipates total loss vehicle values will see increases of 1-3 percent industry-wide for the full year in 2013, with further softening in values in 2014. Newer model year used vehicle prices are expected to see some further tapering in 2013, as inventories from lease returns and rental-company trade-ins begin to rise. Continued tight supply of older model year vehicles – still in high demand for subprime buyers moving back into the market, will drive continued firm pricing for older model-year vehicles, and ultimately set the basement for used vehicle pricing. With more than 70 percent of total losses for vehicles aged 7-years plus, total loss costs are unlikely to fall off sharply in the next 18-24 months.
With customer satisfaction levels typically lower for total loss claims, it becomes increasingly important for insurers to insert themselves earlier in the claim lifecycle to potentially prepare policyholders for the higher likelihood of total losses as the vehicle ages and to offer products or services that can help customers in the claims process.
The information and opinions in this publication are for general information only, are subject to change and are not intended to provide specific recommendations for any individual or entity. Although information contained herein has been obtained from sources believed to be reliable, CCC does not guarantee its accuracy and it may be incomplete or condensed. CCC is not liable for any typographical errors, incorrect data and/or any actions taken in reliance on the information and opinions contained in this publication. Note: Where CCC Information Services Inc. is cited as source, the data provided is an aggregation of industry data collected from customers that use CCC’s products or services and/or that communicate electronic appraisals via CCC’s electronic networks.
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[ii] Vellequette, Larry P. “Boom in on; enjoy the ride.” Automotive News, August 12, 2013.
[iii] CCC Information Services Inc.
[iv] Experian Automotive, “Automotive Industry Insights: Q4 2012.”
[v] Vellequette, Larry P. “Boom in on; enjoy the ride.” Automotive News, August 12, 2013.
[vi] Automotive News.
[viii] CNW Marketing Research, Inc.
[x] Experian Automotive, “Automotive Industry Insights: Q4 2012.”.
[xi] Experian Automotive, “Automotive Industry Insights: Q4 2012.”
[xiii] Tom Kontos, ADESA and www.manheimconsulting.com.
[xiv] NADA Guidelines, June 2013.