What’s Driving Total Loss Frequency?
(This article was originally featured in Insurance Networking News.)
Total Loss Frequency Remains Elevated
Analysis of vehicle claims data for 2015 to date shows that the rate at which vehicles are being totaled versus repaired has risen for the industry. What’s driving this increase, and when can we expect to see it start to trend down?
U.S. Vehicle Population – Recession Hangover
In the ten years prior to the latest U.S. recession (CY 1997-2007), the average annual number of new vehicle sales in the U.S. was 16.7 million.1 Sales began to nosedive in CY 2008, and hit bottom in 2009.2 Simply comparing the pre-recession ten-year average to the actual sales from CY 2008 to 2014 shows there were 22 million fewer new vehicles hitting the road in the U.S. 3
The by-product was the average age of the fleet on the road in the U.S. aged more quickly, and remains at a record high of 11.5 years of age.4 IHS Automotive projects the average age will reach 11.6 years in 2016, but strong new vehicle sales will mean the average age will not reach 11.7 years until CY 2018.5 In fact, data from Experian reveals as of March 31, 2015, 72 percent of all light vehicles on the road in the U.S. were six years and older.6
Scrappage rates have trended downward after the Cash for Clunkers program in CY 20097, and vehicles last longer than ever. Combine that with strong new vehicle sales, and claims volumes are beginning to shift to the older and newer ends of the vehicle spectrum.
Comparison by CCC of total loss frequency by vehicle age shows total loss frequency grows with the age of the vehicle. For example, the average repair cost for a one year old vehicle is about $3,300, and yet the average vehicle value of one year old vehicles was over $25,000. Over three-quarters of one year old vehicles sustain damage that results in a repair cost that is between zero and thirty percent of the loss vehicle’s value; with less than seven percent of one year old vehicles overall that are deemed total loss. Compare that to a vehicle that is between 10 and 15 years of age where the average repair cost of $2,000 and its average vehicle value is just over $6,300. Within vehicles aged 10 to 15 years of age, only 36 percent have a repair cost that is between zero and thirty percent of the loss vehicle’s value, and thirty-two percent of the vehicles of this age are deemed total loss. The overall range in the cost of vehicle repairs increases for newer vehicles, and is less for older vehicles. However, the average value of vehicles has a much broader range, which changes dramatically as they age. Subsequently, more of the older vehicles have repair costs that hit the total loss threshold.
As the graph above shows, total loss frequency is not only higher for older model year vehicles, but it has risen for nearly all age groups after a lower rate of frequency in the three prior years.9 There are several factors that may help explain why.
As discussed earlier, data from CCC shows more vehicles now fall in the oldest and newest age groups. Among the older vehicles, growth in volume share was greatest for vehicles age 15-years plus, where more vehicles have repair costs that reach the market value of the loss vehicle. For all claims (repairables and total losses), over 30 percent of vehicles age 15-years plus in the rolling 12 months ending Q3 2015 had repair costs that exceeded 70 percent of the market value – 30 percent of which were flagged as a potential total loss.
For vehicles current to 3 years of age, less than six percent of the overall claim count had repair costs that exceeded 70 percent of the market value. 10
Additionally, while vehicle values remain elevated, there are smaller year-over-year rates of increase than during the last several years. Values are even beginning to fall for 1-3 year old vehicles where used vehicle supply in the market has improved (see chart below).11
Conversely, vehicle repair costs for all vehicle ages have continued to grow year-over-year between 2 and 3 percent, with repair costs for the newer model year vehicles now growing between 3 and 4 percent annually.
Comparison of CCC data for the rolling 12 months ended Q3 2015 shows an increase in the percent of overall claim count where the repair cost is greater than 70 percent of the loss vehicle’s value. This could potentially suggest that the damage sustained by loss vehicles has also led to higher repair costs. The largest increase in miles driven has occurred on interstate roads where vehicle speeds are higher and vehicle accidents more severe; and lower gas prices tend to lead to more speeding.
If you compare 2014 repair costs to this year’s repair costs, repair costs across all vehicle ages appear to be accelerating faster this year, and are accelerating faster than the change in the vehicle value by vehicle age. Subsequently, more vehicles within each age group are becoming total losses.
However, this trend is not expected to continue, as strong new vehicle sales are starting to ramp up the share of vehicles on the road in the U.S. that are newer, where the value of the vehicles are higher and, therefore, less likely for a damaged vehicle to be declared a total loss.
In fact, IHS Automotive forecasts that between now and CY 2020, the market will see a further shift of vehicle volume to the newest and oldest segments as the recession vehicle sales drop works its way through the vehicle population (they are projecting a 24 percent increase in vehicles age 0 to 5 years of age; an 11 percent decline in vehicles age 6 to 11 years; and a 15 percent increase in vehicles). 12
If the same rates of change in the vehicle age distribution occur within automotive claims by CY 2020, CCC projects the industry would see an increase in newer age vehicle claims where total loss frequency is lower but repair costs are higher, and a smaller increase in older age vehicle claims where total loss frequency is highest.
In fact, applying rates of change projected for the U.S. vehicle fleet by IHS Automotive to the current CCC vehicle claim mix by vehicle age results in a decline of nearly one percentage point in the overall frequency of potential total losses, and an additional increase in vehicle repair costs above what might occur due to inflation.
So while our hangover of older vehicles will continue to keep total loss frequency elevated in the near future, it will come down again in the longer term as the fleet becomes newer.
1 Automotive News “U.S. total vehicle sales by make.” www.autonews.com
3 CCC calculation based on U.S. new vehicle sales per Automotive News “U.S. total vehicle sales by make.”
4 Naughton, Nora. “Average age of U.S. fleet hits record 11.5 years, IHS says.” www.autonews.com, July 29, 2015.
6 Experian Information Solutions, Inc. “Experian Automotive Quarterly Briefing: First Quarter 2015 automotive market share trends and registrations.”
7 IHS Automotive, NADA data 2014. www.nada.ord, “Vehicles in operation-scrappage, by year,” p.15
8 CCC Information Services, Inc.
12 Naughton, Nora. “Average age of U.S. fleet hits record 11.5 years, IHS says.” www.autonews.com, July 29, 2015.