As we head into 2018, automotive and technology companies continue their race towards vehicle autonomy.
Daily headlines provide accelerated timelines when autonomous vehicles will be available in large numbers, communicating with one another via vehicle-to-vehicle and vehicle-to-infrastructure communication. And yet, there are still over 260 million cars and trucks on the road in the U.S. with an average age of 11-plus years; vehicles last longer than ever before, and scrappage rates remain low.
Subsequently, when we look ahead for 2018, what happened in 2017 can provide a good gauge for what we can expect, but must be blended also with knowledge of how quickly our world is evolving through technologies such as robotics, artificial intelligence, telematics, and evolving automotive electronics, composites and metals.
U.S. vehicle sales for 2017 came in lower than 2016 sales, and most analysts believe sales will continue to flatten in the next several years, but will continue to rise in price. The data in Figure 1 (below) shows the average MSRP and how it has grown over two percent annually over the last five-plus years, according to NADA DATA from 2014-2016. Higher MSRPs have been driven by consumer preference for light trucks and higher content new vehicles, which cost not only more at time of purchase, but also if that vehicle needs repair or is a total loss.
Vehicle repair costs rose again this year, and all signs point to further increases next year. Key to the increase is growth in newer model year vehicle share, where repair costs are higher. For the four quarters ending Q3 2017, vehicle repair costs for non-comprehensive losses were up about 2 percent; with the largest increases occurring among current model year vehicles (up 3.4 percent) and vehicles aged 1-3 years (up 2.4 percent) — see Figure 2 below.
Growth in the number of labor hours per claim, the average hourly labor rate, the average number of parts replaced per claim, and the average price paid per part are all contributing to higher repair costs overall. Volume share growth in segments like light trucks, European vehicles, and newer model year vehicles where repair costs are higher, are also contributing to higher cost overall (see Figure 3 above). For the four quarters ending Q3 2016, light trucks account for over 46 percent of all collision and liability repairable appraisals, European vehicle share has grown to nearly 10 percent, and less than 37 percent are now aged seven-years plus.
Assuming a similar shift in vehicle age in CY 2018, and similar increases in repair costs, the industry may experience a further increase in the average repair cost for collision and liability losses of 2.0 percent.
Despite a seven-year run (CY 2010-2017) of positive year-over-year growth in auto sales, 48.5 percent of the total U.S. light vehicle count is older than 11 years of age, according to The State of Auto Care 2018 from the Auto Care™ Association. IHS Markit estimates that overall U.S. vehicles in operation will grow 10.4 percent by CY 2021, and the number of vehicles aged 16 years and older will grow over 30 percent from 62M in CY 2016 to 81M in CY 2021 (on top of the 77 percent growth from the 35M in CY 2002).
Among non-comprehensive loss vehicles valued as total loss by CCC, the percent of valuations for vehicles aged 16-years plus grew over 90 percent, from 7.9 percent in CY 2002 to 15.3 percent in CY 2016 (see Figure 4 below). In CY 2017, that number grew even further to 15.4 percent, keeping the share of total loss claims elevated for another year.
With a continued hangover of these older model year vehicles, in CY 2018 the industry will likely see further increase in total loss frequency. As vehicles age, their value naturally depreciates and typically total loss share grows. In fact, assuming the industry experiences similar rates of total loss frequency per individual vehicle age in CY 2018, the growth in older vehicles’ share alone may lead to at least another half percentage point increase in total loss frequency (see Figure 5 below). Because, despite the shift in automotive claims towards a newer vehicle fleet again; many older model year vehicles remain.
2017 was expected to be the year when large volumes of lease returns would begin to significantly drive down used vehicle values due to increased supply. As it turned out however, both wholesale and retail used vehicle prices softened only moderately, and only within certain segments. And, because the volume of newer model year vehicles rose, the aggregate average price of used vehicles actually rose. For example, Manheim's Used Vehicle Value Index hit all-time records, reflecting not only higher MSRPs of vehicles when purchased new, but also enough demand (aided by need to replace vehicles destroyed by Hurricanes Harvey and Irma) in the market to absorb the higher volumes of lease returns.
And Edmunds.com's average transaction price for used vehicles also rose, as the share of vehicles three years or newer made up a larger share of used retail vehicle sales, and prices on older units remained strong.
For the four quarters ended Q3 2017, the average total loss adjusted vehicle value for collision and liability losses was up 1.7 percent versus the same period prior year. It's the anomaly of the age mix of total loss valuations however, that led to this overall increase, since all age groups except Current Year vehicles actually saw total loss vehicle values decline (see Figure 6 above).
Overall the volume of off-lease vehicles is expected to grow further in 2018 and 2019, so analysts still fully anticipate used vehicle value retentions will fall (see Figure 7 below). Subsequently, assuming no significant shift in the make-up of collision and liability total loss vehicle mix, total loss values will likely continue to soften in 2018. Applying similar value declines and volume shifts experienced in CY 2017, the automotive insurance industry may experience only a moderate 0.1 percent increase in average total loss adjusted vehicle values in 2018.
When claim costs for repairable vehicles and total losses are combined, the automotive insurance industry may experience an increase of 2-3 percent in its collision and liability overall average claim cost.
From a claim frequency perspective, the industry will likely not see significant decline in automotive claims in the near term (see Figure 8 below). Higher employment, low gas prices, more miles driven, greater road congestion and numerous other factors continue to keep rates of accident frequency elevated.
Moderate increases only are likely if we see no major economic slowdown or widespread severe winter weather like in 2014 and 2015. Registered vehicle counts in the U.S. are forecast to grow a bit more slowly, but with more vehicles on the road, and moderate growth in the miles per vehicle, overall ‘exposure’ rates are still elevated to pre-recession levels With market penetration of collision avoidance systems accelerating however, claim frequency will over time decline, most likely in a meaningful manner beginning in 2020.
With comprehensive losses accounting for anywhere from 10 to 20 percent of all losses on an annual basis, overall claim costs (ultimately decided by the individual cost per claim plus the overall number of claims) for the industry are much harder to predict. Increasing severity of storms, floods, hail, wind, snow, and ice have led to significant cost and frequency spikes over the last several years.
So while daily headlines remind us that significant change is coming to vehicles, vehicle ownership, and the whole notion of personal mobility, the next several years will continue to see conditions suggesting strong demand for both the auto insurance and collision repair industries. Further growth of the overall vehicle population, as well as growing share of newer model year vehicles within auto claims, suggest both claim counts and costs will experience further growth in the next several years.
Susanna Gotsch is director of analytics, Product Management, at CCC. She can be reached by sending email to firstname.lastname@example.org.
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The information and opinions in this publication are for general information only, are subject to change and are not intended to provide specific recommendations for any individual or entity. Although information contained herein has been obtained from sources believed to be reliable, CCC does not guarantee its accuracy and it may be incomplete or condensed. CCC is not liable for any typographical errors, incorrect data and/or any actions taken in reliance on the information and opinions contained in this publication. Note: Where CCC Information Services Inc. is cited as source, the data provided is an aggregation of industry data related to electronic appraisals communicated via CCC's electronic network or from total loss valuations processed by CCC.