What's Happening?

Current trends in the motor industry and Guide on motor insured values

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The motor industry has faced a number of major challenges over the past two and half years.

Motor manufacturing plants were impacted by:

  • the Covid-19 lockdown restrictions
  • the July 2021 riots
  • the war between Ukraine and Russia, as well as
  • the recent KZN floods.

Due to the global lockdown restrictions, the motor vehicle components supply chain has severely impacted the production and supply of new motor vehicles which has had a knock-on effect of increasing the demand and supply of used motor vehicles, resulting in the escalation of the price of used vehicles.

It is widely believed that the increase in used vehicle sales is driven by the impact of supply chain disruptions as well as stock levels at vehicle OEM’s and dealerships. New vehicle sales were also negatively impacted by the recent fuel price increases and the interest rate hikes, which make the cost of motor ownership higher.

With less disposable income and increased interest rates, vehicle owners tend to retain their vehicles for longer periods which in turn increases the demand for used vehicles.

This could have a major effect on the calculation of retail values as related to motor vehicle insured values and quantum at the time of a claim.

One of the vehicle pricing tools at our disposal is the TransUnion® SA Vehicle Pricing Index (VPI). “The index measures the relationship between the increase in pricing for new and used vehicles from a basket of passenger vehicles from 15 top volume manufacturers using sales data from across the industry.”  Of particular interest in the recent VPI Q1 2022 Report is the Q1 2022 VPI Results and the Used-to-New Ratio, a summary of the findings follows:

Q1 2022 VPI Results

According to the Q1 2022 report, the price of used cars in SA increased far more sharply than new cars, when compared to Q1 2021. The used vehicle price moved to 7.9% (Q1 2021: 3.7%) whereas new vehicles prices reduced to 4% (Q1 2021: 8.8%). According to the report, used vehicle pricing increased for the 12th successive quarter.

 

Q1 2022 Used-to-New Ratio

“The ratio indicates that finance houses are financing 2.2 used vehicles for every 1 new vehicle”.

The impact on the insurance industry

Although there are other service providers, the insurance industry generally makes use of TransUnion Auto Information Solutions to determine retail values of vehicles that are used to set insurance premiums, and to determine the retail value at claim stage.

Vehicles are generally insured at retail value.

What should be considered when determining a vehicle value for insurance purposes:

The Retail value of the vehicle as detailed in TransUnion Auto Dealers’ Guide or other suppliers’ value tables (brokers must be aware of the correct use of the guide),

which must be adjusted to include:

  • the value of manufacturer-fitted optional extras,
  • the percentage adjustment (increase or decrease) based on the odometer reading and condition of the vehicle,
  • the value of aftermarket accessories.
  • aftermarket accessories should ideally represent the purchase price of the items at the time of the loss; the basis of settlement will however depend on the policy wording. Brokers should clarify the application with insurers.

Please see below how vehicle values are determined by TransUnion:

 

Data is received and published by TransUnion monthly in arrears. Unless otherwise advised, values obtained via online platforms do not represent real-time values. Data on used vehicles is dependent on several vehicles of similar make and model being sold.

We have recently seen a clear shift in values due to the pandemic and shortage in parts, whereby the market value of certain used vehicles now exceed the retail value of similar used vehicles.

The direct and indirect impact of supply chain disruptions on the insurance industry are:

  • clients may be exposed to a shortfall between what they receive as an insurance pay-out and the cost of replacement with a similar vehicle
  • clients may wait much longer for a vehicle to be repaired, due to a backlog in obtaining replacement parts, and
  • the average cost of claims is rising, driving insurers to increase premiums.

This presents a clear challenge to clients and brokers.

The FIA initiated discussions with both the SAIA and TransUnion expressing Member concerns over the disparities in values and the possible negative outcomes to clients at the time of claim settlements.

TransUnion interaction with insurers is ongoing but as with any product change, progress is slow. Other than offering assistance to enable insurer IT platforms to calculate Market Place Indicator (MPI) scores, they offered a low-costs analysis of insurers’ book. Whilst one insurer is not interested in engaging TransUnion, others see the advantages and may in time engage TransUnion. One insurer indicated that they will use MPI manually as a second reference at claims stage.

The following options should be considered during the advice process:

Challenge identified

Action

Used Vehicle Values

It is important to educate clients on what is happening in the market. This can be done by including practical examples in your record of advice or renewal document.

Highlight the importance of obtaining the vehicle odometer reading and condition at inception or renewal and obtaining valuation / engineering certificates, where appropriate, to ensure vehicles are correctly insured.

Consider agreed/guaranteed value options where appropriate e.g. classic cars, collectors’ items or high-valued vehicles.

Repair period of motor vehicles and lead time to replace motor vehicles

Given the period it may take to repair or replace vehicles, consider:

·       Car hire cover, or

·       Extending the car hire period where cover is in force.

Partner with an insurer where you know that part sourcing and procurement will ensure the right client outcomes.

Certain vehicle selling prices are higher than that in motor industry value guides   

The demand for and availability of used vehicles may result in the selling price of vehicles being higher than published retail values.

Various insurers are offering motor vehicle cover extensions that will allow insured values to be increased in the event of a total loss, where the insured value is found to be inadequate due to such increases in selling price.

Brokers should establish the options available from insurers and advise clients accordingly.

Motor vehicle premiums/rates

As we start to see the impact of insurers increasing motor vehicle premiums/rates, it is important to inform clients that the motor premium is driven by:

·       Type of cover

·       Type of vehicle

·       Claims history

·       Driving behaviour.

Clients should also be aware of the following factors that play a role in the increase in motor vehicle premiums:

·       Inflation

·       Supply chain disruption

·       Shortage in skilled resources.

Clients should be offered alternatives to reduce premiums:

Specified vehicle policies-

·       Higher excesses

·       Named drivers / listed regular drivers (not advisable as cover may be voided if details aren’t maintained)

·       Reducing cover to third party, fire and theft on low-valued vehicles (not advisable if the client does not have the funds to repair accident damage).

Motor unspecified vehicle/fleet policies-

·       Higher excesses

·       Deposit premium option (on sizable fleets where the loss ratio is low. If claims don’t exceed say 60% of the deposit premium, the balance of the premium is not payable)

·       Self-insurance on large fleets e.g. Aggregate Excess arrangements.

To ensure that the principles of TCF and the requirements of FAIS are upheld, Brokers are urged to ensure that clients are made fully aware of the concerns and nuances around the establishing of the motor vehicle values for insurance purposes.

For a link to the Quarter 1 pricing index click here

To view the infographic click here