Impacts of the Semiconductor Chip Shortage to the P&C Insurance Economy
Like many technology-reliant industries around the world, the auto industry is experiencing the impact of the global shortage of semiconductor chips, the microchips that power digital devices and process data. In the auto industry, these chips power Advanced Driver Assistance Systems (ADAS).
What caused this shortage? At the start of 2020, high demand for semiconductor chips was expected because of nationwide efforts to roll out 5G connectivity. Then came the COVID-19 pandemic, and the massive shift to remote work and schooling drove demand for microchips powering personal technology such as laptops, gaming devices, and internet infrastructure. Demand outpaced production and waitlists for these chips grew longer. Now that the automotive market and the wider economy are beginning to recover from the pandemic, the chip manufacturers are unable to keep up with even more demand.1, 2
Automakers are feeling the impact; in the last week of April, the chip shortage stalled production of more than 121,000 vehicles in North America. Recent earnings conference call transcripts for many of the largest public companies in the automotive and insurance industries address the issue, indicating significant concern for the ripple effects this shortage could cause to the ecosystem in the coming months. The consensus seems to be that the shortage will continue throughout most of the second quarter 2021 and significant relief will not occur until 2022.
Of course, automakers are not alone in feeling the pinch. If the shortage lasts long enough, the industry could see delays in repair times and increased repair costs, among other issues. Here are a few ripple effects that may impact the industry in the next few months.
Impact of the Semiconductor Shortage to the Collision Repair Cycle
An analysis of DRP repair data year-over-year (Figure 1) does not yet indicate the chip shortage is causing delays for collision repairers. This could possibly be because collision repairers and parts suppliers are still working through existing inventory of parts. We anticipate that delays for repairers may become an issue in Q2 or Q3 if the shortage lasts as long as experts predict.
In fact, in the short term, repair times appear to have improved despite higher-than-average vehicle repair costs. The ‘Percent of On-Time Repairs” however has declined in the rolling four quarters ending Q1 2021 when compared to Q2’19-Q1’20, (Figure 2) but that may be more a by-product of COVID-19 challenges scheduling staff and technicians with new safety rules in place.
Non-OEM utilization of parts has also climbed in recent months, both in terms of share of part spend but also share of claims. (Figure 3) This could possibly be a by-product of a slightly older vehicle mix, or because repairers are looking to aftermarket and recycled parts as alternatives to OEM parts that might have delays.
Potential Impacts to Repair Costs, Total Loss Frequency and Valuations
As automakers await more supplies of microchips, the stall in production of new vehicles is resulting in less new vehicle inventory for customers, who may turn to the used vehicle market to make their purchases. Higher demand for used vehicles may, in turn, contribute to elevated retail used vehicle prices, add further pressure to total loss costs, and result in higher salvage prices. Higher salvage prices means potentially higher costs for recycled parts, which in turn could elevate repair costs and lead to higher total loss frequency.
CCC continues to monitor impacts to the industry of the semiconductor shortage as well as recent shortages in precious metals that are driving parts and auto theft and replacement parts’ inflation. As these market trends develop, we will continue to share data and analysis to guide the industry.
1 – https://www.reuters.com/article/chips-shortage-explainer-int/explainer-why-is-there-a-global-chip-shortage-and-why-should-you-care-idUSKBN2BN30J
2 – https://www.washingtonpost.com/technology/2021/03/01/computer-chip-shortage-explainer-qa/