The variables for auto physical damage are considerable. Damage, destruction, loss or vandalism are all facets that must be considered, as well as malicious mischief, collision, weather-damage, and a variety of situations and events in between. By examining these variables, as well as the ratio of repairable and total loss claims, claims payments, and external events, such as wildly changing exchange rates, and the global melt down of new vehicle sales volume, and we can begin to appreciate how auto physical damage averages can fluctuate over the years—and why claim costs can be dramatically impacted by all these factors.

North America as a whole is entrenched in the midst of an unprecedented slow-down of vehicle sales. New car sales in the U.S. dropped 18.3% in 2008, from 16.1 million units to 13.2 million, according to James Clark, general manager of Santa Barbara, CA-research firm Automotive Lease Guide. In Canada, sales didn’t dip quite so much, with the value of national car sales decreasing by only 3.5% compared with 2007, according to Statistics Canada. Fewer sales in the U.S.—Canada’s largest trading partner—and fewer sales domestically, meant consequences across the economy.

One consequence of declining new vehicle sales is an increase in the average age of vehicles. As consumers choose to drive older cars, rather than buy new, the value of these vehicles will decrease. Insurers that underwrite these policies will probably, then, see more vehicles total out in the event of an accident, or weather event, which will increase claims costs and total loss ratios.

Also, last year’s dramatic rise in fuel prices severely impacted resale values of trucks and SUV’s. This is important because trucks and SUV’s have traditionally had a lower total loss ratio than passenger cars because of their higher actual cash value. The heightened initial value often increased the probability that SUVs would be deemed repairable in the event of a collision. However, the unprecedented drop in SUV and truck values last summer, due to higher fuel prices, will also impact the total loss claims costs.

The recent increase in Original Equipment Manufacturer (OEM) collision parts prices will also impact total loss averages. Most OEM’s instituted significant price increases in 2008 to counteract the rising costs of manufacturing and slow vehicle sales. While this reaction resulted in lower OEM parts usage in collision repair estimating, it is important to consider the costs of rising OEM prices as policies will be impacted.

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There are three aspects that make up the majority of costs:
• 1) Replacement parts,
• 2) Labor needed to repair, replace or paint those parts, and
• 3) The cost of the paint and materials needed to refinish the affected components.

A breakdown of these average repair costs shows that replacement parts and labour make up the largest portion of the total cost to return a collision-damaged vehicle to pre-accident condition.

However, the correlation between total ratio losses and collapse of new vehicle sales cannot be ignored. In the third and fourth quartile of 2008, the percentage of total losses jumped dramatically (See Chart 1). This was due, primarily, to the loss in truck and SUV values due to the combination of a new vehicle sales slump and rising fuel costs.

These external factors on claims costs also had a positive impact. A closer examination of costs shows that the decline in average parts was actually able to drive down the average gross severity. This is due, in part, to the rising rates of OEM parts. Many appraisers looked for alternatives to OEM parts once the prices started to rise, prompting repair facilities to use aftermarket parts to reduce parts spend. Collision repairers also found that it was more economical to repair parts whose prices had increased. These two factors lowered the parts dollars index, therefore offsetting the increases in labor and paint/materials costs.

The result of all this is that overall average physical damage claims severity will continue to increase because of the rising percentage of total losses. This rising cost will be tempered in Canada by a reduction in repairable severity and cost, prompting labour costs to become the number one cost for collision/damage claims. With an increase in older vehicles on the road, however, there may be an increase in claims, even if there is no increase in per unit cost.

In the chart below each component of the average gross severity is indexed and the total loss percentages are charted with Q1 2007 as a base of 100 on the index.

Source: Mitchell’s Canadian AIM database

Inflation Factor	Qtr 1 2007	Qtr 2 2007	Qtr 3 2007	Qtr 4 2007	Qtr 1 2008	Qtr 2 2008	Qtr 3 2008	Qtr 4 2008
% Total Loss	100	89.69	99.12	99.90	97.92	89.38	101.04	103.90
Avg Gross severity	100	94.11	99.17	101.73	99.38	96.76	100.92	100.31
Avg Part $	100	89.53	91.30	98.43	95.29	85.91	86.90	92.51
Avg Labor $	100	98.13	106.79	104.38	102.29	106.48	114.61	106.59
Avg Addl Cost $	100	97.50	103.61	104.37	104.63	104.89	108.35	108.73

Source: Mitchell’s Canadian AIM database

Greg Horn is vice president of Industry Relations for Mitchell International.