11/13/2014

Trends in Auto Claims

What’s driving fewer but more expensive repairs?

By Susanna Gotsch

As we head towards the end of another year, many in the industry begin wondering what’s in store for the coming years in terms of automotive accident claims frequency and costs. In short, it appears to continue to be moving to an environment of fewer but more expensive repairs.

A number of research articles over the last several months have looked specifically at the role that technology is playing in this arena and trying to understand what current claims data can tell us about the impact of technologies like crash avoidance and lightweight vehicle construction. These also point to a similar message of fewer but more expensive repairs.

Using historical and current claims data can help estimate just how many fewer and how much more expensive automotive claims there will be in 2015 and 2016.

The Economy: A Bit Brighter

Economic growth contracted by over two percent in the first quarter of 2014, slowed by the bad weather in many parts of the U.S., according to the Bureau of Economic Analysis (BEA). In the second quarter, the economy rebounded with growth of four percent. Most economists believe full year 2014 U.S. GDP growth will fall between two and three percent, says the BEA.

According to a September 2014 newsletter by Mesirow Financial’s Chief Economist Diane Swonk, employment figures are improving, gasoline prices are stable, and continued low interest rates and pent-up demand are encouraging consumers to make big-ticket purchases of items like vehicles. The seasonally adjusted annualized sales rate (SAAR) peaked at 17.5 million in August 2014 (the highest since January 2006), and strong sales through July to September have led Edmunds.com’s analysts to revise their projections for new vehicle sales to 16.4 million for the full year.

Experian Automotive reports that strong sales have led to an increase in the overall light duty market size of approximately 1.5 million registered vehicles in the U.S., and the Insurance Information Institutes says more vehicles have helped insurers see decent growth in auto premium. Many analysts, such as those at Manheim and Edmunds, project U.S. light vehicle sales will climb to 17 million-plus in the next several years, building on strong sales growth coming out of the Great Recession. Key to this growth will be low interest rates and the assumption that, after six years of recovery, there is still pent-up demand. The longer loan terms that many customers are choosing in order to achieve a lower monthly payment may lead to more years between vehicle purchases and trade-ins, however. For now, though, there is little indication that sales will tumble. Rather, it seems the marketplace will see flat to moderate growth in the coming years.

Forecast for Frequency

Swonk’s previously mentioned research also indicates that long-term, broader demographics such as baby boomers working longer, lower rates of labor participation in all age groups, and further spread in income for top earners from the rest will continue to create headwinds for economic growth.

Combine slow economic growth with greater numbers of self-employed, the popularity of telecommuting, further growth of alternative modes of transportation such as car-sharing services, and it seems likely that in the next decade, there may be some transformation in the traditional notion of transportation (one vehicle for one person).

Some of this is already evident in miles driven in the U.S. Despite the fact that there has been some increase in 2014, the Office of Highway Policy Information reports that it’s still nearly two percentage points below where it was before the recession.

As a result of the continued impact on auto accident frequency from broad demographic factors such as aging population, greater availability and adoption of crash-avoidance technologies, fewer miles driven, and more urban dwellers, CCC anticipates little-to-no increase in collision or liability frequencies. The exception to this may be seasonal spikes like those experienced in the first quarter of 2014 (which was due in part to harsh winter weather that drove up vehicle collisions) and increases in hail, wind, or water losses from extreme weather in certain geographical areas (April tornadoes in Mississippi and Arkansas, May hail losses in Colorado, and hail and straight-line wind damage in June).

Has Vehicle Age Plateaued?

The disruption in the pattern of 16-17 million new vehicle sales that coincided with the recession created a break in the historic sales cycle, reports AutoNews.com. With fewer new cars sold, the average age of vehicles increased to 11.4 years by 2013 and has led to a greater share of older model year vehicles in use today in the U.S., according to R.L. Polk & Company’s vehicle registration data.

Within the automotive claims data collected by CCC, the aging fleet drove a ramp up in average age of repairable vehicles from 5.1 years mid-year 2006 to 6.4 years mid-year 2012. Since that time, the average age of repairable vehicles has plateaued at 6.4—and it’s likely to remain there or start trending down slowly in the coming year.

On the other hand, total loss vehicles continue to age, as data from Experian Automotive shows more than 70 percent of all vehicles in operation in the U.S. are vehicles aged seven-years plus (mid-year 2007 or older).

CCC data on total loss valuations for January through August of each calendar year show vehicles aged seven-years plus continue to grow—from 66 percent in 2009 to 75 percent by 2014. Because the total loss frequency is highest for vehicles aged seven years plus, a growth in volume share of these vehicles is a primary factor in driving up total loss frequency overall. Subsequently, given the age of the fleet, CCC anticipates total loss frequency will remain fairly constant with where it has been over the last several years: 15-18 percent of automotive claims likely to be totals. Within the next five years as the market begins to see further growth in new vehicle sales, it is likely that total loss frequency will back down one or two percentage points.

Forecast for Claims Costs

Total loss values are up two percent from the same period in 2013. Largest increases are for comprehensive losses (5.7 percent), then liability losses (two percent), followed by collision losses (1.4 percent). Comprehensive losses have seen larger increases due to the increase in large hail and flood losses in many parts of the country in 2014. A comparison of average age for collision (nine years) versus liability (12.9 years) losses in part explains the smaller increases in total loss values for collision (see Graph 1 for age group volume share).

Vehicles aged seven or more years continue to see larger increases in average values through August 2014 versus the same period for the prior year than other age groups, with the exception of current model year vehicles, which reflect higher average MSRPs for vehicles purchased today than in the past.

Data from numerous sources on wholesale and retail used vehicle prices have pointed to a rising supply of newer model year vehicles from lease returns, rental car programs, and trade-ins starting to soften prices on used vehicles up to seven or eight years of age. However, with very limited additional supply of older model year vehicles and continued strong demand for these vehicles, particularly in the subprime sector, their prices remain strong. Subsequently, while overall wholesale and retail used prices are expected to see further softening in 2015, CCC expects further small increases or flattening total loss costs, since 75 percent of all total losses fall in this older age vehicle group.

Between 1997 and 2007, the average vehicle repair cost increased on average between one and three percent annually. As of mid-year 2014, the overall average repair cost was up 1.8 percent from the same period in 2013, with collision losses up 2.7 percent, comprehensive losses up 0.7 percent, and liability losses up 1.6 percent. This is in line with historic rates of increase and consistent with the weather patterns in the first and second quarters of 2014 that drove up collision losses.

While total loss vehicles continue to age, increases in new vehicle sales have plateaued the average age of repairable appraised vehicles and will, over time, trend the average age down. Distribution of repairable appraisal volume by vehicle age not only shows increases in vehicles aged seven or more years, but also in the current model year vehicles. Historically, the newest vehicles have higher repair costs than older vehicles, and data through June 2014 shows that differential growing even further.

Changes to vehicle designs to address consumer demands for more options; more lightweight materials being used in vehicle construction; and the proliferation of sensors and electronics related to crash avoidance technologies continue to drive up the average MSRP to more than $30,000, as well as vehicle repair costs. Subsequently, with a growing share of repairable volume comprised of the newest models, CCC anticipates additional pressure on repair costs above the historic trend. For 2015 and 2016, CCC anticipates repair costs to rise between three and four percent.

Final Say

Fewer accidents due to broad demographic trends and early impacts of crash avoidance technologies point to reduced frequency. Continued strong vehicle sales in the U.S. will lead to growing numbers of newer, more complex vehicles among repairable vehicles, lifting average repair costs. Continued strong used vehicle pricing for older model year vehicles that make up the vast majority of total losses will keep total loss costs elevated in the coming years. These factors combined lead us to conclude that the industry will continue to move to an environment of fewer but more expensive repairs.  



Susanna Gotsch is director, industry analyst, for CCC Information Services Inc. She has been a CLM Fellow since 2013 and can be reached on Twitter @ccc_susanna or online at www.cccis.com.

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