Are high deductibles depressing claim severity?

Jan. 1, 2020
The latest edition of the Mitchell "Industry Trends Report" focused on the supposed relationship between rising insurance deductibles and relatively flat collision claim severity.  

The latest edition of the Mitchell "Industry Trends Report" focused on a number of economic and industry trends, including the supposed relationship between rising insurance deductibles and relatively flat collision claim severity.

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According to Greg Horn, vice president of industry relations at Mitchell and author of the report, it has been assumed that higher deductibles were driving stagnant severity figures, but things appear to be more complex than that.

The Insurance Information Institute published figures earlier in the year that show average severity for auto physical damage collision claims rose in 2011 for the first time since 2006 to $2,861, up 3.06 percent from 2,776 in 2010. "We're seeing it creep up a bit," Horn said during a conference call.

From 2006, average claims dropped for four straight years, falling nearly 13 percent. Even the increase last year leaves severity more than 10 percent below 2006 levels. This happened despite relatively steady increases in collision claims frequency over the same period. At the same time, many drivers are buying insurance plans with increasingly high deductibles as a way to save money. So is there a link between rising deductibles and falling claims values?

Based on Mitchell's data, the rise in actual cash value of vehicles (as well as the average of vehicles on the road) is having more impact on claims severity than deductibles.

For one thing, comprehensive deductibles have risen at a faster rate than collision deductibles, but without the same impact of reducing average paid severity. Since 2006, average vehicle age has skyrocketed. Since 2009, there has also been a rise in actual cash value of vehicles being appraised (thanks in part to rising used vehicle values).

The rise in actual cash value in 2011 and 2012 (now north of $14,000) seems to have helped boost average severity by putting more high-value repairs back in play (as opposed to creating additional total losses). "What is driving flat performance on collision paid severity? I think we have to look beyond the simple factor of deductibles," Horn said.

In the report, Horn says, "The conclusion I draw is that deductibles do not seem to be the most important factor contributing to changes in average severity for either collision or comprehensive claims. The rise in indexed actual cash value, which is running opposite of vehicle age, appears to have the greater influence on the rise in repairable severity."

Appraisal, labor figures

In Q3 2012, the average appraisal consisted of 41.27 percent in parts costs, 47.35 percent in labor, and 10.81 percent paint and material costs, according to Mitchell's figures.

Looking at parts more closely, in Q3 OEM parts represented 67 percent of all parts dollars specified by Mitchell-equipped estimators, a 0.87 point relative decrease from the same period in 2011. Aftermarket parts accounted for 13.04 percent of those appraisals. Remanufactured parts represented 6.59 percent of the average gross parts dollars, and recycled parts accounted for 13.36 percent.

Labor rates have risen in just a few states compared to Q3 2011. The biggest increases were in Illinois (3 percent) and Texas (2 percent).

New materials coming to the shop floor

Horn also outlined some technological trends that will impact repairers. For one, Ford displayed a carbon fiber hood earlier this year at an event in Germany. The hood weighs more than 50 percent less than its steel counterpart. Advanced materials will be key to the company's weight-reduction efforts.

GM's recent investment in a company called NanoSteel may also point to new alternative materials. According to the company, the NanoSteel products can be cold formed (like regular steel), but are lighter and stronger than other alternatives. The material can be placed into an existing assembly line without all of the costly alterations required for other materials like aluminum. In practice, it should behave like a slightly-thicker gauge steel in the repair process, although there hasn't been an real study done on the material yet to test for repairability in an auto application.

"NanoSteel could be put into the assembly line without those alterations," Horn says. "GM says it could save hundreds of pounds, and it has the same shaping and reshaping capabilities with the same equipment used on regular steel."

"I think you can always bet that [material] complexity will impact average severity going forward," Horn said, although he added that it remained to be seen exactly how much of an effect lightweighting would have on claims values. The increase in advanced electronics would also likely push up repair costs (and total losses).

The report also includes a general economic forecast, trends in average rental lengths, and the Canadian collision summary.

For more information, download a copy of the report here.

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