Auto Insurance Costs: A Perfect Storm
New technologies, the rise of electric vehicles (EVs), and escalating labor costs are creating a financial squeeze for auto insurance companies and repair shops, according to a recent report. Repairs are becoming more expensive and taking longer, trends that are reshaping the industry.
While modern vehicles are safer and better at preventing accidents, the advanced technology incorporated is driving up repair expenses, leading to higher claim costs and lengthier repair times. This information comes from CCC Intelligent Solutions Inc., a cloud-based operation that supports the property/casualty insurance sector.
Their latest report analyzes data from 300 million claims-related transactions, alongside personal injury protection and medical payments claims from CCC’s customers.
These shifts have significantly increased the time it takes for vehicles to enter repair shops post-estimate completion, rising by 60% compared to pre-pandemic levels.
Kevin Shumate from Crawford & Co. supports the report’s findings, highlighting significant changes in auto repair and claims processing.
Robert Passmore from the American Property Casualty Insurance Association affirms that the CCC report validates the escalating claims costs insurers are observing daily, which directly impacts premium prices.
Technology: The Main Culprit
New vehicle technology is a central driver of increased costs and extended repair times, particularly due to the expense of fixing vehicles equipped with advanced driver-assistance systems (ADAS).
Modern passenger vehicles are highly advanced, often containing over 1,400 semiconductor chips—and nearly double that for electric vehicles—, plus around 30,000 individual parts.
Electronic components like collision warnings, safety technologies, and ADAS now contribute to about 40% of a new vehicle’s overall cost.
The report shows that safety features like automatic emergency braking (AEB) are also becoming more widespread. From roughly a quarter of total U.S. automaker production in 2017, vehicles equipped with AEB reached 60% by 2019, and 95% by 2023.
Escalating Challenges and Costs
The evolution in vehicle technology brings a complex set of challenges:
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Repairs Require More: More parts, more labor hours, and diagnostic actions such as scanning and calibration.
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New Materials: The cost of vehicle components is inflated by the adoption of new material types.
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Parts’ Share: Parts now make up a larger proportion of total repair expenses.
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Replace Over Repair: Shops are increasingly replacing parts rather than repairing them, requiring different skill sets from repair technicians at inflated costs.
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Damage Detection: Difficulties in promptly detecting damage result in more repair supplements.
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Longer Times and Costs: Consumers confront lengthier repair periods and greater costs.
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Claims Increase: Claim cycle times and expenses are increasing, which causes premiums to rise.
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Tech Impact: Increased vehicle technology doesn’t significantly reduce accident frequency, but it does increase overall expenses.
The Impact of Electric Vehicles
EVs are becoming more common in repair assessments, which is another major factor. EV repairs come with increased expenses and longer repair times due to specific repair procedures and capacity limitations.
EVs are often totaled less frequently, reflecting evolving valuation trends. The report indicates a jump in EV sales. In 2013, less than 50,000 EVs were sold, but by last year, over 1.2 million EVs were sold. Today, EV sales account for 1.9% of repairable appraisals.
Additionally, the average repair cost difference between EVs and non-EVs is approximately 50%. Data shows that the percentage of electric vehicles globally was at 14% of new car sales in 2022, up from approximately 9% in 2021. It is expected that 14 million EVs will be sold by the end of 2023.
Labor and Other Key Factors
The prevalence of EVs converges with higher labor costs. Labor hours per claim are up for newer vehicles, particularly EVs. Over the last 10 years, this difference has grown by nearly 40%.
EVs three years old or newer have labor costs representing 45.5% of total repair cost, contrasted with 35.9% for equivalent non-EVs.
A report from March, from Mitchell International Inc., shows the frequency of claims for repairable electric vehicles climbed to its record level in 2023, closing the year at 1.97% in the U.S. and 2.86% in Canada.
Collision repair labor costs in general have gone up in the past two years, and may continue to increase. The demand for new collision technicians is expected to hit 20,000 per year through 2027, with 75% of these roles needed to replace existing positions.
The CCC report notes that the growing number of vehicles in operation has increased by 150 million, while the number of service bays has declined by 55,000, exacerbating the labor shortage.
Supplements and Hidden Costs
An additional trend, highlighted by Shumate, is the increasing percentage of supplements in the claims and repair process. These supplements, especially for newer model vehicles, add to the cycle time.
Hidden damage discovered post-estimate delivery continues to drive the costs up.
In the past, one supplement per vehicle was normal, but increasing vehicle complexity, as mentioned in the CCC report, suggests that supplemental discoveries are on the rise. More complex vehicles may require two, three, or four supplements.
A parts supplement might also occur when a part is unavailable immediately, necessitating a search for an alternative part or shipping it from abroad. This impacts cycle times and can potentially increase the severity of the damage.
Medical Expenses and Inflation
Additionally, medical expenses are another factor in rising costs, the CCC report states. Despite a reduction in treatment duration and the number of procedures for injury claims since 2021, the severity continues to climb due to increased costs for medical bills, especially for high-cost treatments such as radiology and surgery.
The average amount paid on third-party bodily injury claims has steadily increased to $25,000.
Passmore from APCIA notes that inflation is a major driver of these cost increases. Inflation has markedly increased the cost of car repairs and replacements.
The increasing technological sophistication of cars also plays a part in raising costs. This includes the need for more parts, higher labor costs, and additional procedures for scanning and calibrating systems, causing repair costs to rise significantly.
Moreover, recent reports indicate that drivers are engaging in riskier driving behaviors, including speeding, distracted driving, and driving while impaired. These behaviors drive up injury and collision claim costs.
“All indicators suggest elevated auto repair and replacement costs will stretch well into 2024 and potentially beyond,” Passmore said.
Insurers are advising drivers to minimize risk by avoiding behaviors such as distracted driving, speeding, and impaired driving, which can result in accidents.
