By Chris Bakes, managing director, auto solutions; Jason Kurutz, director, product management and business strategy; and James Paprocki, managing director
For more than two years, news of global economic fluctuation — driven by the fallout of COVID-19 and a variety of climatic, geopolitical and other factors — has dominated financial headlines.
The automotive industry is, of course, not immune to this volatility, and it’s trickled down into the auto claims space. Insurance carriers, fleet managers and corporations alike have seen consistently rising claim costs in the past couple of years. Let’s examine the impact of the economy on auto claims, what’s behind the trends, and what can be done to help control costs.
Economic roadmap
Unfortunately, there is a lingering shortage of automotive parts around the world. The insufficient supply of parts can be attributed to several interconnected economic factors.
For decades, the auto industry has relied on “just-in-time” manufacturing. This means that vehicles and their parts are made in accordance with current demand, rather than in advance. When carefully coordinated, a just-in-time approach helps to promote efficiency and control production and warehousing costs. It does not, however, account for the kinds of major disruptions the industry has experienced in the past two years.
The insufficient supply of parts can be attributed to several interconnected economic factors.
The COVID-19 pandemic led to widespread factory closings and labor shortages, as well as bottlenecks in trucking and marine cargo. Additionally, newer vehicles feature complex safety and infotainment systems that require semiconductors. These microchips are still in extremely short supply due to manufacturing slowdowns and heightened demand for smart devices and other electronics. Further compounding the situation is the Russia-Ukraine conflict; the area normally provides multiple raw materials to the global auto industry and produces car parts, such as wire harnesses, that are essential to the manufacturing process.
Claims collision course
The convergence of these supply chain complications, along with inflation across most economic sectors, amounts to a near-perfect storm for organizations trying to manage auto claim costs. The standard percentages commonly used in adjusting auto claims simply don’t apply in this environment.
In general, it’s cheaper to repair a damaged vehicle than to replace it. That approach, however, presumes the availability of replacement parts. Many critical auto parts remain on backorder, significantly extending claim durations. In cases where vehicles are undrivable until the necessary parts arrive and repairs can be made, liable parties must pay for longer-than-normal transportation replacement and damaged vehicle storage. (When they are safe to drive in the interim, the owners — many of whom are not at fault — may be left with damaged vehicles for extended periods, and that does not make for positive claim experiences.) Even the parts that do become available cost significantly more than they did just a few years ago.
Additionally, more vehicles are being declared total losses. Damaged cars that, under normal circumstances, would be repaired are instead being replaced due to unpredictability in parts availability or, in rare cases, the right skilled labor to complete the repairs. However, many of the same factors affecting auto parts are similarly disrupting the new and used car markets. Demand for new cars is outpacing production, leaving lots with low inventory and popular models on backorder — even at above-normal prices. The dearth of available new cars means that used cars are also in low supply, further driving up costs.
Shifting gears to curb costs
While some aspects of the supply chain are beginning to normalize, the auto industry is likely to remain under stress for the foreseeable future. Consider these two tactics to help control your claim costs:
- Utilize a direct repair network: A nationwide network of auto repair facilities has greater buying power than one local repair shop and may be able to secure parts faster. Leveraging a DRP can reduce claim durations amid part delays. (See here for more on Sedgwick’s auto DRP.)
- Double down on maintenance and safety: The best way to reduce claim costs is to prevent claims from occurring in the first place. Make sure your vehicles undergo proper maintenance and are in good working order — before something goes wrong and major repairs are needed. Additionally, with costs on the rise and road traffic returning to pre-pandemic levels, now is the ideal time to focus on driver safety education programs, so your vehicles and their drivers can stay out of harm’s way.
Learn more — read about Sedgwick’s end-to-end auto solutions and the latest insights from our auto claims experts