Car Prices Are Way Up. That Could Be Trouble For Auto Insurers.

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About the author: Marty Ellingsworth is executive managing director of global insurance intelligence at J.D. Power.

Nearly two years into a global reckoning on the supply chain, inflation, and new and used vehicle prices, auto insurers are staring down a big problem. All the analytical models built with historical data to determine repair and replacement costs now need a refresh. Every vehicle claim underway might be significantly more expensive than those models assumed. And portfolios of vehicle policies may need to redress their capital concerns given the forward-looking nature of this inverted depreciation curve.

Depending upon how insurers address this challenge, they could be facing a toxic combination of inadequate premiums and pressure to raise rates. For those who get the new valuation formula right, however, this evolution presents an opportunity to generate more precise estimates than ever, while offering customers hyper-personalized plans. The key is accessing more granular, vehicle-specific data sets.

Understanding the Pricing Problem

Before we get to solutions, it’s important to understand exactly how the marketplace has shifted over the last two years to create this problem. The supply chain disruption that has caused a scarcity of new vehicles and OEM parts has had far-reaching effects. As an example, let’s say you got into a fender bender while holiday shopping and your vehicle needs a replacement right rear panel. Odds are good right now that the manufacturer will not have that panel in stock for weeks or months. If you do happen to find the part in stock at a local auto body shop, you shouldn’t be surprised to pay a mark-up of upward of 30% to 50% for it based on supply and demand. Suddenly, the $800 part you need becomes a $1,200 part. Insurers who haven’t accounted for that phenomenon are left holding the bag.

It’s even worse in a total-loss scenario. Traditionally, cars take their first big hit of depreciation once they’re driven off the lot, then gradually trend down further over a decade on the road, before eventually falling below a threshold where the cost of repair would be more than the cost of paying out the value of the vehicle. 

But as the value of used vehicles has skyrocketed—data from J.D. Power shows a more than 50% rise in the cost of used vehicles on average—it changes the equation. When an adjuster looks for a comparable value on, for example, a 2015 sedan with $10,000 in damages, a total loss is a lot harder to rationalize if that sedan has retained an unusually high value.

Processes across the insurance value chain have historically been built on trended data that  rarely saw dramatic change over a period of a few years.. But the unique economic events since 2020 means they must be completely re-thought. New data sources that provide a granular understanding of exactly what is on each vehicle frame need to be introduced to replace the old assumption-based model. 

A New Era of Personalization

As these new conditions force insurers to create more accurate, personalized pricing, the ripple effects will be far-reaching. At J.D. Power, we project the current surge in used-vehicle values will recede from the recent crest of 70% above the norm for the past decade, but that the new plateau of values may be 50% higher on an ongoing basis. But insurers cannot simply tack on a 50% increase to all current and future claim reserves for auto property damage. 

Instead, they need to develop risk-rating and pricing engines capable of creating personalized insurance rates that account for a deeper understanding of vehicle attributes and values, along with continuous underwriting and risk pricing using observational data like mileage, routes traveled, and driver behavior. These new, tailored valuation methods can create the in-market values per vehicle based on an individual vehicle identification number , which outperforms a one-size-fits-all depreciation curve, because the curve is now upside down.

This can be difficult for legacy system insurance companies to accommodate, but newer data, AI, and cloud-enabled processes can remove the burden of execution off legacy operations and apply API-ready processes to curate ongoing like-for-like valuations for both new and used vehicles on a continual basis.

From the customer perspective, this creates a double-edged sword. While their cars are worth more than their loans and prior expected values, which leaves some upside down in their vehicles, replacement and repair costs are growing, and that means loss cost-based insurance rates are likely to find a new, higher equilibrium. However, by tailoring policies to the individual, based on more granular, VIN- and driver-specific data attributes, it will be possible for insurers to offer customers more customized plans than ever before. This, in turn, has the potential to create the kind of personalized customer experience that builds long-term loyalty and advocacy. 

Staying Ahead of the Curve

This is an inflection point in the industry. Unpredictable conditions have presented new challenges and opportunities. Near-real time valuation will improve pricing, billing, underwriting, risk management and claims for companies, while making the value of risk-based pricing more transparent and desirable to consumers. 

Even the most optimistic forecasts don’t foresee a turnaround in used car pricing before next fall, which means insurers will have to adjust on the fly in the year ahead. Those that can find ways to account for this volatility will not only reap the short-term benefits but will set up the infrastructure to help navigate through the next crisis.

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