Canadian Underwriter

Substitutes and the Auto Claims Industry

August 1, 2007   by Greg Horn

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At Mitchell International, we have noticed a developing trend in the Canadian claims environment: Higher dollar claims are being considered a total loss more often and lower dollar claims are not being made to insurance companies because owners are paying out of pocket for repairs rather than make a claim.

In analyzing these factors, we have come up with the term ‘substitute.’ A substitute is a claim that is either a total loss claim or a claim that is not made at all — either because of higher deductibles or because the number of accidents has decreased.

What effect does a substitute have on the claims industry? It shrinks the distribution of repairable claims made on both the higher value claims (more are total losses) and the lower end (the claim is not presented at all). The result of this is lower cost repairable claims that are easy to adjust and help lower cycle time are less common, and so are the higher more complex repairable claims because they frequently result in total losses.


Substitute 1: People get in fewer accidents.

Despite an increase in the population of registered vehicles in Canada in the last decade, the frequency of crashes has decreased. Several factors have led to this decrease in auto accidents and damage claims. Cars are better engineered, safer and more responsive due to the widespread installation of anti-lock brake systems, better halogen and xenon lighting systems and an increase availability of accident avoidance systems such as backup and blind spot sensors. However, cell phones and other driver distractions offset some of these advances

Additionally, with the baby boomer generation in their safest driving years, the driving behavior of the largest portion of drivers will contribute to lower claims frequency until their driving skills begin to deteriorate. So these factors are, for the time being, contributing to the lowering frequency of claims. But there will eventually be a flattening out and, as baby boomers age, a potential increase in claims frequency.

Substitute 2: Total loss trends

The frequency of total loss claims has increased in Canada since 2000 for several reasons. Engineering plays a role in total loss trends due to the prevalence of advanced safety equipment that drives up the cost of repairs, but durability and corrosion resistance have increased, as well. In Canada, the average age of the passenger car on the road is now almost nine years, which is a record age for vehicles. Canadians are able to keep their cars longer because the improvements in durability have allowed vehicles to reliably last for 200,000 kilometers or more, while the sheet metal is better able to withstand salt corrosion than twenty years ago.

So what effect does that have on a shop owner? Older cars, or ‘car park,’ have a lower actual cash value and therefore will ‘total out’ in lower dollar collisions. Newer cars, with a higher actual cash value, have expensive safety equipment (such as multiple airbags) that was lacking on cars before the 1990s and this, unfortunately, also drives newer vehicles to total out. The majority of cars on the road today in the Canadian car park have dual airbags and this has a direct influence on the cost of repair and the number of vehicles that are totalled. The cost of replacing only two airbags and the components they damage upon deployment is estimated at $1,800.

A case in point: In a study I did a few years back, I looked in to the issue of the General Motors “J” body cars — the Cavalier and Sunfire. Looking at the successive years of re-registration of the 1994 and 1995 model years, I found some stark differences. After two years from new, the 1995 and later models totalled out at a greater rate than those of the 1994 and prior after two years on the road. The reason? In 1995, dual front airbags became standard equipment. The cost of replacing the additional airbag (approximately $600) was not enough to total significantly more cars, but the ‘collateral damage’ caused by the passenger airbag deployment added significant costs to the repair. In the case of the “J” Body car, the instrument panel and windshield were damaged by the passenger side airbag and airbag lid. The additional costs of these components associated with the airbag deployment added a total of $782, in addition to cost of the passenger side airbag module, pushed an alarming number of these cars into the total loss category.

Substitute 3: Increasing deductibles

Increasing deductibles can of course lower the frequency of claims presented, which is a good thing for carriers, but it may also drive your average measured severity up by having claims presented on higher dollar amounts over the deductible threshold. I think it is a worthwhile exercise to map your average repairable severity, claims frequency and average deductible to see if your paid severity has been affected by a rise in what deductible amount your customers are choosing.


The substitute of people having fewer accidents or making fewer low dollar claims has a positive effect on the insurance industry. Lower claims frequency is a good thing for a carrier, but it makes management of the claims you do receive that much more critical to your success as a claims operation.

Triage heavily damaged cars at the First Notice of Loss

Currently, approximately 26 per cent of physical damage results in a total loss and 34 per cent of claims are non-drivable. That means that 76 per cent of non-drivable claims result in that vehicle being totalled. I believe the total loss percentage will come close to 90 per cent of non-drivable claims, up from the current 76 per cent.

Correctly managing total loss claims is already a key driver of cycle time and customer satisfaction, but as the trend continues to rise, it becomes even more important to triage your non-drivable claims to make the appropriate decision to either send it to the body shop or the salvage pool. With the average cycle time in Canada from date of loss to date of the estimate being just over 23 days, an improvement of 10 per cent in cycle time on total loss claims would mean a savings of $49 dollars in avoided storage and $78 dollars in saved rental expense on a quarter of your claims volume. Over time, the $147 saved on these claims can add up to significant savings.

Verify your appraisers are making the proper total loss decisions

Are your total loss cars really totals? I did a study at a large carrier looking at the accuracy of the total loss decisions made by field staff. I re-inspected, and in some cases tore down for complete accuracy total loss vehicles that had been moved to the salvage pool. What I discovered was a ‘gap’ between the total loss thresholds of 80 per cent of actual cash value and the full extent of the damages. On average, the carrier was totalling vehicles out at 61 per cent of the actual cash value average of $6,925 and the gross recovery averaged 21 per cent of the actual cash value, leaving a gap of 18 per cent, or a dollar equivalent in this carrier’s case of $ 1,246.50.

Manage the middle tier

The largest impact of the substitute is there is a swelling of claims volume in the medium severity hit, those between $1,500 and $3,500. What does that mean for the claims department? It means focusing on improving handling efficiency and cycle time for claims in this area is key to improving your overall results because improvements here will have the largest impact. A good place to start is to reduce the number of unnecessary supplements. We have studied the cycle time impact at Mitchell and have seen that the first supplement to an estimate adds on average a day and a half to the repair cycle time. Looking at the main drivers of supplements for your company, can lead to some ways to reduce them and improve cycle time. For example,
are the majority of supplements for aftermarket or remanufactured parts the shop claims are not in stock? A little digging into the issue to resolve it may reduce supplements appreciably.

Are the majority of your supplements for missed damage that could be a training issue? By looking at supplement rates by appraiser, you may find a training opportunity that could lead to a reduction in cycle time.

While we can’t change the population’s driving habits or the expensive safety equipment driving the increase in total losses, we can focus on the factors we can change and improve accuracy, cycle time and overall results. And in the end, driving those results may make you more accurate than your competitor.

Greg Horn is the vice president for industry relations, Mitchell International, after 20 years in insurance claims managment. Prior to joining Mitchell, Horn was the vice president of material damage claims, GMAC Insurance.

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