Today more than ever, it appears that data is the prevailing generator powering the automotive claims and collision repair industry. By helping all of us understand industry trends, data can better prepare us for what lies ahead. Each year, CCC Information Services publishes Crash Course, a comprehensive look at the previous year’s data and what it might tell us about the future. Some of last year’s more telling trends—the economy, claim frequency and total losses to name a few—are explored below.

Economic Factors Affecting the Vehicle Marketplace

U.S. economic growth remained strong in 2005 and is expected to hold steady or slow slightly, despite higher energy prices, rising interest rates and the war in Iraq. Consumer spending continued to drive much of the U.S. and global economy in 2005, with consumers often funding their purchases by borrowing against the value of their homes. Business did its part and began spending in 2005, and stronger economies in Europe, Japan, China and India are expected to further drive global growth in 2006.

How does this economic data translate into the new and used vehicle marketplace? Key themes for 2005 were not dramatically different than in prior years. New vehicle sales were just shy of 17 million, and improved employment drove strong used vehicle sales, whose prices rebounded in 2005 at a rate not seen since 1996. Development in the areas of safety, electronics, performance and fuel economy was big news; manufacturers continued to look for ways to attract new customers and began reducing manufacturing costs through the use of platform-sharing technologies.

Another aspect changing the economic landscape is the paid claim frequency for private passenger non-fleet auto insurance. Although the rate of decline is showing some signs of slowing, claim frequency experienced further declines in the first three quarters of 2005. Competition in the personal lines auto sector helped keep premium growth down below the rate of increases in loss costs, making enhanced underwriting practices and risk management critical to ensuring the industry’s underwriting profit in 2006.

One of the most watched baseline numbers is vehicle repair costs, which saw an increase of more than 3 percent in 2005, driven by factors such as higher labor costs (both in terms of more labor hours per appraisal and increases in hourly rates) and more parts replacements per claim. The changing mix of vehicles—more newer, non-domestic and light trucks—served as a contributing factor as well, a trend that appears most likely to continue through 2006.

Total Losses

Perhaps one of the concerning outcomes of the shifting mix of vehicles in the face of rising repair costs, increasing vehicle complexity and lower residual vehicle market values, is the rising percentage of vehicles being totaled versus repaired. In 2005, 13 percent of all vehicles for which an appraisal was written were ultimately deemed a total loss or non-repairable (note: this does not include vehicles that were obvious totals where no appraisal was generated—for example the vehicles totaled by Hurricane Katrina.).

The total loss percentage of vehicle appraisals generated by staff appraisers, who tend to see a broader mix of driveable and non-driveable vehicles, field and drive-in claims, was 19 percent in 2005, versus 6 percent for appraisals generated by external appraisers (repair facilities and independent appraisers). When measuring the total loss percentage (total loss valuation count divided by total loss valuation count plus repairable appraisal count), the total loss percent was 19 percent in 2005.

Another key factor to the increases in total losses is the market value of used vehicles. Used vehicle prices dropped sharply with the introduction of zero percent financing, as many rental fleets downsized. Consumers also found that they could get more in a new vehicle for less than in a used vehicle. With the market value of a vehicle dropping, the point at which the total loss threshold is reached dropped as well. In 2005, however, wholesale used vehicle prices as tracked by Manheim and ADESA experienced their largest increase since 1996. According to ADESA, wholesale used vehicle prices neared those seen in the first half of 2002, when the prices were in the high $9,000s.

Subsequently, the industry appears to be in the midst of a reversal from previous years, where lower overall claim frequency and lower total loss costs helped to mitigate the full impact of increased total losses from a cost perspective. After dropping each year since 2001, the average total loss vehicle value rose sharply in 2005. With the market value of a vehicle now rising, the point at which the total loss threshold is reached rose as well, resulting in slightly lower total loss frequency.

A shift toward higher deductible levels has likely also contributed to a costlier average repair, as has the fact that lower dollar repairs are no longer being claimed. Another key factor driving up vehicle claims costs in 2005 was that an estimated 15 to 20 percent of vehicles were deemed non-repairable, or a total loss. A rapid reversal in total loss costs in 2005 meant even higher overall vehicle claims costs—not only were more vehicles being totaled, but when they were totaled, the overall cost was higher than it had been in the past several years.

The challenge for automotive insurers in the coming year is similar to the challenges facing automotive manufacturers: remaining competitive and creating differentiated products in an environment of lower prices and higher costs. As declines in claim frequency begin to slow, the ability to remain profitable in the face of competitive rates and rising loss costs will be a greater challenge for the automotive insurance industry. For the collision industry, the challenge is similar to that of the insurers—attracting more business from a smaller pool, while realizing greater efficiencies.

The Future of Total Loss

Several factors working together could keep total loss costs high in the coming years:

1. Vehicles last longer than ever before, and increased demand for some of the older model year vehicles—given trends including improved employment and growing demand for vehicles in markets such as Mexico—will keep their value high in the marketplace.
2. The continued growth of new technologies and materials used in new vehicles means there will be more vehicles that pose challenges to the industry in terms of repairability. The ability of collision industry to keep up with the technologies and materials will be key in determining whether a vehicle can or will be repaired versus totaled.
3. This industry, like all industries, will continue to be susceptible to the rising costs of raw materials—whether it is steel, aluminum, petroleum, plastics or paint materials. The occurrence of a natural disaster or political/economic uprising could drive up prices dramatically in a short period of time, as Hurricane Katrina did in 2005. Higher costs for parts and materials will drive up the overall cost of repair, and potentially increase the number of vehicles hitting the total loss threshold.

The Road Ahead

Despite the record economic loss from catastrophes, the property-casualty industry is expected to close 2005 with its second consecutive year of underwriting profits. Competition in personal lines auto, combined with improved underwriting, has resulted in a tighter pricing environment; the ability to properly underwrite risk and anticipate any reversal in the slowing trend of declining claim frequency will be critical.

Vehicle repair costs will continue to rise as the cost of parts, materials and labor continues to grow. Total loss costs are expected to increase further—both from a higher average vehicle value and from a steady-to-increasing percentage of vehicles deemed non-repairable or total loss.

The bottom line: Sophisticated analysis will be central to understanding which factors contribute most to cost and effective claims management.

Susanna Gotsch is Director of Analysis and Reporting at CCC Information Services Inc., and author of Crash Course.