What is the future for new and used car sales claims?

U.S. auto sales for the first six months of 2018 were stronger than many analysts originally anticipated, but were driven in large part by growth in fleet sales while retail sales were essentially flat.

Higher interest rates, some pullback by auto lenders, less consumer demand, and higher gas prices were among the headwinds faced by the U.S. new vehicle market. However, it still managed to see an increase of 1.9% for the first six months of 2018 versus same period in 2017 (car sales fell by 11.8%, while light truck sales grew by 10.0%).

Most new and used vehicles were financed, with average payments and loan term lengths hitting new highs according to Experian’s “State of the Automotive Finance Market First Quarter 2018” report. Unfortunately, this means that many more people owe more money on their vehicles than they are worth, and the percent of new vehicle loans with negative equity also remains high according to Edmund’s 2018 Automotive Industry Trends: Midyear Update.

How will tariffs affect pricing?

Growing issues with new vehicle affordability have been a key reason used vehicle sales have remained strong both in terms of volume and pricing. Despite significant increases in used inventory from large volumes of lease returns, wholesale and used vehicle prices have remained relatively stable, registering much smaller declines than many analysts had originally feared.

The younger age and quality of vehicles coming back as lease returns has led to higher overall used vehicle transaction prices, which according to Edmunds.com reached an average of $19.7K in Q1 2018 versus $16.7K in Q1 2013.

The tariffs imposed by the U.S. on July 6 of this year, and the threat of additional tariffs could drive up new vehicle prices even further, potentially slowing auto sales in the second half.  The tariffs against China that went into effect in July add a 25% border tax to Chinese-made vehicles made for U.S., and U.S.-made vehicles face a new 40% tariff in China.

The U.S. is still working to determine whether it will impose tariffs on other countries, based on whether imports are threats to national security. About half of parts and vehicle imports come from Canada and Mexico, so any tariffs put on those countries could have severe impacts on U.S. auto sales.

If prices on new cars are raised, more consumers might shift to the used market (annually only about 17M new vehicles are sold in the U.S., in 2018 the U.S. is on track to sell 39.4M used vehicles) — where prices are already up due to more light trucks in the overall volume of lease returns into the used market.

While analysts believe increases in new vehicle prices from tariffs won’t necessarily lead to an increase in used vehicle prices immediately, the tariffs would likely lead to lower depreciation rates for used vehicles, a factor that would lead to higher total loss vehicle values over time.

Total loss vehicle values remain elevated so far in 2018, as the shift towards a newer, more expensive total loss vehicle population continues. Non-comprehensive total loss vehicle values are up over 3% for the four quarters ending Q2 2018 versus a year prior; and vehicles aged 0-6 years of age now account for 34% of total loss volume versus 29% in the four quarters ending Q2 2014.

Total loss frequency also continues to rise, as the percent of total losses that were older than 15 years of age remains elevated at 15.4%, and among vehicle appraisals, total loss frequency increased across all vehicle ages.

Impact on vehicle repairs

Vehicle repair costs also rose 3% in the four quarters ending Q2 2018, with the largest increases occurring among the newest vehicles. 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.

Yet while both repair costs and total loss costs continue to rise, the industry has begun to see a leveling off in claim frequency. The U.S. economy continues to be strong, unemployment numbers are at all-time lows, and the U.S. has seen registered vehicle counts grow again to nearly 1.3 vehicles per licensed driver says Michael Wayland in his U.S. sales outlook on autonews.com.

However, as growth in vehicle registrations has again surpassed overall growth in U.S. miles driven, the miles driven per vehicle (a proxy for ‘accident exposure’) have fallen, helping collision and property damage liability claim frequency to also taper. For example, repairable claim counts (excluding comprehensive) for 2018 through June were up only 0.4% from the same period in 2017.

Less severe winter and spring weather in many parts of the U.S. has also meant fewer overall losses. A comparison of the share of losses with primary impact of hail or water for the first six months of the year reveal a much smaller percent in 2018 versus several prior years.

Comprehensive losses share of overall repairable and total loss claim counts fell in both Q1 and Q2 of 2018 compared to prior years. Assuming no major economic event such as a full-blown trade war or recession, or no major catastrophe such as a Superstorm Sandy or Hurricane Harvey, data from the first six months of the year would suggest that 2018 will see little growth if any in accident and claim counts. However, given rising costs and repair complexity, both the insurance industry and collision repairers will remain under pressure to have the training and tools to operate efficiently and effectively.

Susanna Gotsch is director and industry analyst for CCC Information Services Inc. Contact her at sgotsch@cccis.com. The information and opinions presented are for general information only, are subject to change and are not intended to provide specific recommendations for any individual or entity.