Putting Humpty Back Together

Prompted by government regulations mandating safety and environmental sustainability, advanced vehicle technology (AVT) may soon reach a point when human drivers find themselves passengers in their own fully automated vehicles. And while that might be a pleasant thought for people who don’t like to drive, the increased integration of AVT into vehicle design means insurers will have difficult decisions to make in the future.

AVT is expensive to repair, escalating the severity of insurers’ claims costs even if claims frequency decreases. The costs associated with fixing the increasingly ubiquitous AVT may soon cause insurers to debate: 1) rate adjustments, 2) when to write off damaged vehicles and 3) the difference between underwriting “cosmetic” and “functional” repairs.

Impact of AVT

Representatives of insurance companies, collision repair centres and Original Equipment Manufacturers (OEM) all met to discuss the implications of AVT at the Canadian Collision Industry Forum (CCIF) meeting in Toronto on Jan. 28.

Examples of AVT include the use of high-strength steels, aluminum, carbon fibre, welding and bonding techniques, electronic vehicles/hybrids, on-board diagnostics and electronic safety features, among other things.

Speakers at the conference noted discussions about AVT used to be relevant only to high-end luxury vehicles. But now AVT is filtering down into the more mainstream design of standard and economy vehicles.

“Four, five or six years ago, our friends at BMW were willing to share where they were going with technology with members [of CCIF] sitting here,” said panel moderator Larry Jeffries, a former chairman of the CCIF. “At the time, you could say respectfully: ‘BMW is still growing, but it’s still somewhat of a niche player. The price point of the vehicle is a little higher.’ But in 2012, we’re talking about [AVT technology] in the Ford Focus and the Chevy Cruze. The technology is not simple. There is advanced technology in those cars at price points that are [affordable for consumers].”

Adjusting rates

Even so, AVT isn’t so widely available that economies of scale make them less costly to repair. Jeffries cited U.S. collision repair statistics suggesting that claims frequency is actually declining, although the number of total losses is on the rise. This suggests the severity of claims is increasing.

Insurers bankrolling the repair of vehicles fitted with AVT technology may soon have a choice to make about incorporating the increased repair costs into the driver’s premium. “Loss costs are obviously important to insurers,” said panelist Rich Zamperin of Allstate Insurance Company of Canada. “Advances in technology drive costs. We’re talking about the increasing complexity, the equipment required to make the repair and the training that’s necessary to make the repair successfully and correctly.”

The accelerated emergence of AVT has thrown a new wrinkle into rating and pricing the auto insurance product. Typically, rating is based on analyzing historical data. But with AVT, “we’re trying to assess the unknown,” Zamperin said. “Some of these new technologies have very little history, not only of [safety] and protection in some ratings scenarios, but also from a manageability [of repair] standpoint. Without that history, it is difficult to set rate.”

In answer to a question from the audience, Zamperin said Canada’s ‘take-all-comer’ legislation means insurers cannot refuse to insure vehicles equipped with AVT. He repeated the oft-used expression that insurers can insure a house that is burning down for the right price, as long as the rate is appropriate for the risk. But as loss costs escalate, so, too, do premiums.

Another issue is how to set rates when AVT is not yet a standard feature of all new vehicles. “Technology continues to accelerate and it is increasingly difficult to figure out the proper rate across the board for all [vehicles] when only a handful may causing this [loss trend],” Zamperin said. “And as things move forward, it becomes not just a handful, but your whole fleet.”

Increased write-offs

When cars with expensive technology are no longer a niche market, the issue of write-offs looms large. “If we’re talking about a Ford Fista that’s sold in the European market and has technology for opening your door — that’s an entry-level vehicle,” said Zamperin. “It’s probably going to cost you $1,500 to $1,600 to repair a car that has thousands [of kilometers] on it and maybe worth only $5,000 at the end of the day.”

Ken Boulton, who was not speaking in his role as the manager of vendor programs at The Dominion, made a similar point when the discussion was opened up to the audience: “The request for a new mirror on a 1974 Cordoba with 450,000 miles on it makes the point that by replacing the mirror, you are only making the rest of the car look bad.”

And so will insurers write off more damaged cars, knowing the cost of restoring the vehicles back to pre-accident condition are not worth the effort? “Nobody likes total losses.” Zamperin said in response to the question. “I certainly don’t, and the customers won’t stand for that. That’s not the way we want things to go in this industry.”

Functional v. cosmetic repairs

In fact, the insurance industry may soon be engaged in a much more nuanced debate about repairing vehicles with AVT. Insurers know customers have an expectation that damaged vehicles will be restored to pre-accident condition following a claim. But as AVT technology becomes more integrated into the overall vehicle design, a question arises as to what kind of repairs might be considered “good enough.”

Jeffries and others in the industry observe that as AVT becomes more integrated into the car’s design, questions may likely arise as to whether or not repairs are “functional” (necessary) or “cosmetic.”

Boulton suggested consumers might develop elevated expectations of repairs as AVT becomes standard in most vehicles (i.e. as the pre-accident condition includes more bells and whistles). This could lead to a discussion in the future about what types of repairs insurers can be expected to underwrite.

“This kind of thing is going to get worse, because most AVT are integrated with the bumpers and grills and all of this kind of stuff,” said panelist Michel Matte of BMW Group Canada. “And if by chance you happen to be cosmetically repairing other parts of the car just to get to that [central damaged part], is that a byproduct of the repair that’s required or is it something that is really required?”