South African consumers have been hit hard in the aftermath of the Coronavirus (COVID-19) pandemic, subsequent lockdowns to help curb the spread of the virus, stagnant national economy and significant job losses that occurred as a result of all these factors.
Adding further fuel to their dismay is the considerable increase in inflation of second-hand vehicles, while new vehicle price increases slowed down substantially. This was confirmed by the latest Vehicle Price Index published by TransUnion. The index showed that second-hand vehicle price inflation increased to levels twice as much as the same time a year ago, while new vehicles’ price inflation was nearly halved compared to the levels of a year ago.
The main reason for this is the inability to move new vehicles off the floor, due to a general shortage of new vehicles. This is compounded by the supply chain shortage, brought about by the pandemic amongst other global causes, which negatively affected and impacted the manufacturing of electronic toys and other consumer goods the previous year. In addition, the recent catastrophic storms in KZN lead to the port being inaccessible and hence receiving new stock was also affected.
Are the rules of supply and demand applicable?
Why is the pricing inflation of new vehicles dropping and not increasing? Should diminishing supply not lead to higher price inflation? The truth is that consumers easily replace new vehicles with quality second-hand ones, so the supply shortage from an economic standpoint, does not affect the overall market. If the status quo continues for a while, we may see the overall supply of vehicles (new and second-hand) be in short supply, to satisfy the demand, which would then see a general increase across all categories of vehicles.
It should be noted, however, that the index is simply delivering great insight into forthcoming pricing inflation trends. This is because data used to produce this index is collected through a wide dealer and finance house network, resulting in the values often being slightly delayed. Employing the index then, and more importantly, forecasting using a straight line and assuming that this value would be adequate will be imprudent.
It would be unwise because firstly, there is no telling exactly when the turnaround of this index will happen: As it stands, most supply chain disruptions are being cleared out, so depending on the speed with which specific manufacturers can get going again, that will determine the exact timing of the reduction. Secondly, not all manufacturers nor derivatives are affected equally, with the more exotic models for example being most affected by experiencing the most volatile values over time.
Why is this causing motorists in general and motor vehicle insurance customers in particular, some anxiety then? Because the value or cost of your car is a big factor in the cost to insure it, so you do not want to be over or under insured.
At Momentum Insure, we don’t want our customers to sweat on the small stuff. Since we are concerned about the safety of what matters most to our customers, we have decided to insure vehicles for retail value regardless of what that value is.
So, at the initial underwriting stage, the actual value of the vehicle is used to check risk acceptance among other things, but the cover relates to the retail value of the vehicle at the time of any potential incident. For example, if a vehicle’s value would have increased from inception by 20% and there is a claim while the retail value is inflated, the claim would be settled for the full retail value, in order to put the customer in a position they were in before. Furthermore, there is also an option to cover vehicles for a nominated value, but this is reserved for those vehicles that do not trade enough to have an official recorded retail value.
You work hard to enjoy the things you’ve earned for you and your loved ones, including your beloved vehicles. That’s why we are committed to giving you cover that helps keep you and the things that you hold dear, safe, by supporting you on your journey to success.