A Crash Course In 2013 Automotive Trends

Superstorm Sandy's Impact
Financial results for the first nine months of 2012 for the P&C insurance industry show marked improvement when compared to the same period in 2011, with the industry's combined ratio dropping to 100.9 versus 109.8 the prior year. Most of the improvement came from fewer catastrophe losses in the first nine months of the year versus 2011; leaving insurers well positioned to absorb the major hit from Sandy. When the estimated $15 to $25 billion of insured losses from Sandy are factored in, most analysts estimate the industry's combined ratio will fall somewhere between 104 and 108 for the full year 2012.

A Moderate Increase In Claims Costs
Private passenger auto claim costs for collision and property damage losses have returned to their pre-recession rates of annual increase, with the average claim amount increasing to just below 3 percent in 2012 from 2011.

Figure A to the right shows how claims costs have tracked to the overall U.S. consumer price index, with the exception of comprehensive losses which increased 18 percent in 2012 alone.

For collision and property damage losses, much of the overall claims costs has been driven by an increase in both the frequency and cost of total loss claims. Contributing factors include: 

• Repair costs have seen more moderate increases, having returned to their pre-recession historic pattern of annual increases in the neighborhood of 2 to 3 percent annually.  
• Posing potential challenges for insurers is how an older vehicle population can mean several things from a premium perspective: as vehicles age, premiums typically decline, and many customers opt out of all but the compulsory coverage. 
• While potentially fewer premium dollars are coming in for these older vehicles, more of them are likely to be total loss claims that typically have higher claim costs but lower customer satisfaction. 
• Claims data would also suggest that a greater share of customers making claims now have higher deductibles, which might mean some of the lower dollar losses that fall below the deductible are no longer being claimed, and therefore helping lift the overall average claim amount.

Several broader trends within the new and used vehicle market have played a role in the trend in claims costs over the last several years, specifically trends within the new and used vehicle markets.

The Used Vehicle Marketplace
The last several years have seen an unprecedented level of volatility within the used vehicle market. Overall used vehicle sales grew by 4.5 percent in 2012 with an estimated 40.53 million sales.

This was the first time since 2007 that used vehicle sales have exceeded the 40-million mark. While new vehicle sales fell 18 percent in 2008, and another 22 percent in 2009, used sales fell only 12 percent in 2008 and only 3 percent in 2009 (see Figure B). 

This drop-off in both new and used sales led to a disruption in the supply of used vehicles available for sale in the market: 

• Fewer trade-ins by consumers and fleet companies.
• Fewer leases and subsequent lease returns were available.

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. 

Historically in the U.S., the ratio of used vehicle sales to new sales averaged 2.5 between 1998 and 2007—that is, 2.5 used vehicles were sold in the U.S. for every one new vehicle annually. When the U.S. entered the recession, that ratio jumped as high as 3.4 in 2009, as consumers that were able to purchase a vehicle opted for used versus new. Subsequently soaring demand at a time of tight demand led to higher used vehicle prices. 

Analysts in the used marketplace often refer to a 'waterfall' pricing effect for used vehicles: 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 because of availability and less impacted by new vehicle prices, 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. With economic growth still slow, and unemployment rates high, many consumers are still unable to afford a new car, and will opt to purchase a used vehicle instead, which could contribute to keeping demand high.

Used Vehicles and Total Loss Claims
While the dynamics that occur in the marketplace in terms of 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—72 percent of all total loss vehicles are aged seven years and older. In fact, the share of total loss valuation count for newer model year vehicles has dropped nearly every year since 2000, as vehicles on the road in the U.S. last longer and consumers hold onto them longer. Additionally, total loss vehicle costs are also impacted by claims frequency patterns, such as catastrophes that can lead to a dramatic shift in vehicle mix and subsequently drive up average values.

Within CCC's automotive claims data, a similar pattern of aging vehicles also appears: the average age of repairable appraised vehicles grew from 5 years in 2007 to 6.1 years in 2012, while the average age for total loss vehicles grew from 8.5 years in 2007 to 9.8 years in 2012. The breakout of repairable vehicle appraisal data by the age of the loss vehicle underscores the shift that has occurred in the last five years to a markedly older mix. More than 40 percent of all repairable appraisals were for vehicles aged seven years and older in 2012—the highest ever recorded in the last 15 years, and over 13 percentage points higher than in 2005. Over the last three years of recovering auto sales, new vehicles' share of the repairable appraisal volume has grown—as sales ramp up further in 2013, it will continue to grow. The implications of a newer fleet are essentially the reverse of what we have discussed in the past regarding an aging fleet: more replace versus repair, lower non-OE parts utilization, and more labor hours per appraisal, which all lead to higher repair costs.

What's more, as newer model year vehicles are now of increasingly higher content/higher cost/more complex material makeup, the market may see a lift in repair costs, and in those instances when accident avoidance systems are not present or do not help avoid or mitigate the accident, vehicle repair may be overall more costly, and for heavily hit vehicles may even result in total loss.