Modern cars are marvellous, except when they need fixing — in which case the bill for a seemingly minor dent can easily reach four or five figures. Consumers and fleet owners are stuck with huge repair bills while insurers are hiking premiums. This type of inflation could prove very sticky.
There isn’t a simple explanation for why car insurance prices have suddenly gone through the roof. Soaring used car values, an uptick in dangerous driving, rising theft, spare parts and technicians shortages have contributed to insurers’ burgeoning losses. Another less explored issue is the increasing complexity of fixing vehicles, and, unlike some of those other factors, that won’t change once supply chains and labour markets revert to normal.
New models — whether powered by combustion engines or electric batteries — have become expensive computers on wheels, sometimes containing up to 3,000 semiconductors. This is wonderful from a safety and driving performance perspective, but replacement parts cost more and modern vehicles take longer to fix.
“If you think about the number of sensors, cameras and the technology embedded in vehicles today, that is driving a significant increase in the underlying cost of repair,” Leah Stearns, CFO of salvage auction company Copart told investors earlier this month.
“So if you get in an accident, a lower level of damage could result in the car being written off.”
In the UK, the cost of vehicle repairs paid for by insurers jumped by one third in the first quarter. Direct Line Insurance warned last month adverse damage claims would continue to pressure earnings this year. No wonder UK car insurance costs jumped by a staggering 43% year-on-year in May, according to official inflation data published this week.
In the US, car repair prices are increasing at a 20% annual rate, or about five times the overall rate of inflation. One of the better performing insurers, Progressive, last month blamed higher than expected costs to fix cars for a deterioration in its underwriting performance, adding it would be “aggressive” in raising customer premiums.
The average number of parts replaced per insurance claim has climbed to 13 from about 10 since 2017, while the average cost of collision repairs has jumped 45% to $4,200 (R78,124) during the same period, according to a report by car repair and insurance software company CCC Intelligent Solutions. Meanwhile, the average length of repairs has swollen to 16 days from 10 since 2019. The longer a vehicle is in the repair shop, the more an insurer must pay for a courtesy car.
These days, even humdrum parts such as mirrors and fenders contain complex sensors. A replacement windscreen that once might have cost $300 (R5,579) will now set you back more than $1,000 (R18,598) if it has technical features such as a head-up display. A replacement headlamp can cost 8% of the value of the car.
“The more technology you add to avoid or reduce the severity of an accident, the more expensive components are in peripheral areas of the vehicle,” Adrian Watson, head of engineering at Thatcham Research, said. “Getting the balance right is hard.” (Thatcham was established by the insurance industry to safely reduce the cost of claims.)
Car electronics may also require diagnostic scans and recalibration after a crash, adding several hundred dollars to repair bills.
Why complexity is making modern cars more expensive to repair
Image: Supplied
Modern cars are marvellous, except when they need fixing — in which case the bill for a seemingly minor dent can easily reach four or five figures. Consumers and fleet owners are stuck with huge repair bills while insurers are hiking premiums. This type of inflation could prove very sticky.
There isn’t a simple explanation for why car insurance prices have suddenly gone through the roof. Soaring used car values, an uptick in dangerous driving, rising theft, spare parts and technicians shortages have contributed to insurers’ burgeoning losses. Another less explored issue is the increasing complexity of fixing vehicles, and, unlike some of those other factors, that won’t change once supply chains and labour markets revert to normal.
New models — whether powered by combustion engines or electric batteries — have become expensive computers on wheels, sometimes containing up to 3,000 semiconductors. This is wonderful from a safety and driving performance perspective, but replacement parts cost more and modern vehicles take longer to fix.
“If you think about the number of sensors, cameras and the technology embedded in vehicles today, that is driving a significant increase in the underlying cost of repair,” Leah Stearns, CFO of salvage auction company Copart told investors earlier this month.
“So if you get in an accident, a lower level of damage could result in the car being written off.”
In the UK, the cost of vehicle repairs paid for by insurers jumped by one third in the first quarter. Direct Line Insurance warned last month adverse damage claims would continue to pressure earnings this year. No wonder UK car insurance costs jumped by a staggering 43% year-on-year in May, according to official inflation data published this week.
In the US, car repair prices are increasing at a 20% annual rate, or about five times the overall rate of inflation. One of the better performing insurers, Progressive, last month blamed higher than expected costs to fix cars for a deterioration in its underwriting performance, adding it would be “aggressive” in raising customer premiums.
The average number of parts replaced per insurance claim has climbed to 13 from about 10 since 2017, while the average cost of collision repairs has jumped 45% to $4,200 (R78,124) during the same period, according to a report by car repair and insurance software company CCC Intelligent Solutions. Meanwhile, the average length of repairs has swollen to 16 days from 10 since 2019. The longer a vehicle is in the repair shop, the more an insurer must pay for a courtesy car.
These days, even humdrum parts such as mirrors and fenders contain complex sensors. A replacement windscreen that once might have cost $300 (R5,579) will now set you back more than $1,000 (R18,598) if it has technical features such as a head-up display. A replacement headlamp can cost 8% of the value of the car.
“The more technology you add to avoid or reduce the severity of an accident, the more expensive components are in peripheral areas of the vehicle,” Adrian Watson, head of engineering at Thatcham Research, said. “Getting the balance right is hard.” (Thatcham was established by the insurance industry to safely reduce the cost of claims.)
Car electronics may also require diagnostic scans and recalibration after a crash, adding several hundred dollars to repair bills.
“It’s not just inflation, it's the average repair today has more labour hours on it and likely more calibration on it than an average repair two years ago,” Tim O’Day, CEO of Canadian collision repair chain Boyd Group Services, told investors last month.
Tech-enabled functions such as automatic emergency braking and reverse parking cameras can help drivers avoid minor scrapes. Yet a hailstorm, theft or collision might result in the vehicle being damaged.
If that happens, repair costs can be enormous, particularly if the carmaker is inexperienced and has made suboptimal design choices. Consider the bill one customer received for repairing a Rivian pickup truck after it was involved in a low speed rear end collision in February. Originally estimated at $1,600 (R29,782), the cost came to an eye-watering $42,000 (R781,798), which isn’t far off the price of the average new car.
I’m no opponent of electric vehicles (EVs), but they can be up to 50% more expensive to repair than a combustion engine equivalent. Not only are EVs generally more expensive to purchase in the first place, the battery accounts for a large chunk of that value.
“Even a small accident could be costly if the battery is involved,” State Farm, the US’ biggest car insurer, warns clients on its website, noting a replacement battery might cost $15,000 (R279,248) not including labour.
On average, insurers charge 12% more to insure an EV, but Bloomberg Intelligence analyst Kevin Ryan says premiums may still not be high enough given the additional risk.
To offset the battery weight, EV bodies also use more expensive, lightweight materials. And, depending on the model, the battery may be integral to the vehicle structure, making it harder to replace.
“Batteries are the costliest spare part in the history of motoring, yet their repairability isn’t always given enough consideration when EVs are designed,” said Watson.
Many repair shops aren’t yet accustomed to fixing EVs and rigorous inspection is required if damage is suspected, which isn’t easy. A recent Reuters investigation found even lightly damaged EVs are often being written off. Tesla resorted to launching its own insurance arm in 2019 so customers can avoid the high premiums often quoted by third-party insurers.
My two cents: carmakers need to focus on building cars that are not only clean and safe, but also don’t cost a fortune to fix when something goes wrong. Even “small changes in design of the bumper” can have an “enormous” impact on the repair cost, Elon Musk told Tesla investors in January. I’m also in favour of drivers being allowed to use cheaper, third-party spare parts, something car manufacturers have long resisted, purportedly on safety grounds. Happily there are moves afoot on both sides of the Atlantic to allow that.
It will be a long time before we’re all whizzing around in driverless cars that never crash. In the meantime, vehicle owners should brace for their car insurance premiums and repair bills to remain high.
More stories like this are available on bloomberg.com/opinion
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