Crash tests

Crash tests

Shipping delays, rising prices, labour and parts shortages are just some of the factors challenging motor repairers – and insurers

By Wendy Pugh

If you own a Chevrolet in Australia, at some time you’re going to need to buy spare parts from the United States. That can be an expensive proposition for insurers right now, as global shipping slows down and containers pile up in ports.

A Chevrolet owner complained to the financial umpire after shipment delays held up repairs for months. His case has reflected carmaker, repairer, insurer and driver frustrations over supply disruptions.

The Australian Financial Complaints Authority found in favour of the Chevrolet driver on some elements in the dispute, while accepting the delays were not the insurer’s fault given the needed parts hadn’t arrived from the US.

Ultimately, the insurer was ordered to pay $4410 for 49 days’ car hire and $2500 compensation and was criticised for not proactively keeping the policyholder informed on progress and for not following up with the repairer.

Covid-triggered supply chain frictions are delaying vehicle and part deliveries, elevating freight charges, fuelling used car prices and increasing rental costs. Closed borders have also worsened skilled labour shortages.

Crash repairer AMA Group, which works closely with the insurance industry, is among firms seeing the impacts as covid variants have emerged and disruptions have rolled on.

“There are lots of pressures all the way through the repair life cycle chain and these things are resulting in increased costs of working and increased costs of parts,” AMA Group Chief Commercial Officer Andrew Mair tells Insurance News. “Ultimately, the average cost of claims will increase and that will then flow through to insureds in terms of increased premiums.”

Reporting by insurers suggests this is already the case amid efforts to mitigate some of the impacts caused by a plethora of inter-connected problems.

A shortage of microprocessors – an essential item for the increasingly sophisticated systems on modern cars – has particularly delayed new car deliveries, adding to other logistical issues slowing production.

Australia, a relatively small market and far from Northern Hemisphere manufacturers and the most lucrative trade routes, must compete for scarce shipping capacity and limited supplies of all sorts of automotive goods.

Under pressure: supply disruptions have hit the car repair market

After arriving in local waters, vessels can then languish offshore if a positive covid case emerges among crews, while vehicle import processing bottlenecks are occurring at some Australian ports.

“The impact of the pandemic on supply chains has meant that we have seen an increase in claim costs largely due to shipping delays and the cost of freight, which has risen significantly,” Allianz Australia General Manager Short Tail claims Danny Adams tells Insurance News.

“Subsequently we have seen an increase in the duration for vehicles to be repaired, which has had a further impact on hire car costs, with customers needing to keep their hire car for a longer period of time.”

Auckland-based insurer Tower points out that a high proportion of materials are imported for motor, home and contents claims across New Zealand and the Pacific, and supply chain problems can have material impacts.

The insurer has raised premiums and worked with suppliers and its networks to moderate the effects, as outlined in its annual financial report.

“Supply chain issues for new vehicles drove up the value of second-hand vehicles by 13% year on year, significantly increasing the cost of total loss motor claims,” Chief Executive Blair Turnbull told the February annual general meeting.

“The Covid-19 lockdown late in the year resulted in higher levels of open claims, and therefore higher claims costs, due to significant delays in completing repairs as repairers struggled to obtain parts. We have taken decisive action to address these challenges.”

A new vehicle delivery date estimator on the Price My Car website recently showed average wait times of 243 days for a Kia Carnival and 241 days for a Toyota RAV4. The Volkswagen Polo had the shortest waiting time, with 22 days. The overall average waiting time for a new car in January was 118 days, compared with 39 days in March 2020.

Used car prices have surged in a knock-on effect as owners retain ageing vehicles for longer and potential buyers search for local options available to drive straight away.

Mr Adams says Allianz is seeing an increase in the cost of total losses for market value policies, which is only partially offset by stronger salvage values, as a result of the booming second-hand car market.

“On policies where we offer a replacement vehicle option we are seeing delays sourcing new vehicles,” he says. “In cases where the delay is unacceptable to the customer, we are offering cash settlements at the full retail value and forgoing our dealer discount.”

Cascading pandemic impacts have added to labour shortages faced by crash repairers. Many were partially reliant on overseas personnel, shut out by border closures, and some staff opted to return to their countries of origin. Local covid restrictions have additionally affected staff availability.

Panelbeaters and spray painters have been in short supply, and smash repairers are competing for key skills with other industries, such as the mining sector, which is also chasing personnel. Wages in mining are, of course, higher.

“With the pandemic, everyone was in shock for the first part of the two years, and it took a little while for all the ramifications of the lockdowns and the border closures to work their way through the system,” Mr Mair says. “But there aren’t many industries that are untouched.”

Pandemic and supply chain tensions have also coincided with new claims handling regulation and the introduction of a revised general insurance code of practice that holds the industry to higher standards.

Mr Mair, who joined AMA after previously working with Suncorp, says the repair firm is working closely with insurers on managing customer expectations from the start of the claims process.

“People are reasonable, and given everything that is going on in the world, from hospitals to transport, everyone understands there are delays at the moment,” he says. “The important thing is still to communicate with people about what is going to happen.”

While supply chains are stretched, insurers have benefitted from relatively empty roads and fewer collisions as cars stayed in garages during the pandemic. Suncorp and IAG half-year results show the two dominant personal lines insurers have also been putting through motor premium increases to offset claims inflation and have been seeking to improve repair process efficiencies.

IAG is increasing the number of sites operating through its Repairhub joint venture, which aims to get cars back to policyholders more quickly, and is seeking to benefit from economies of scale on parts procurement. The inflationary pressure coming through in Australian personal motor and home is forecast to persist for a while yet.

“We expect that to be there for about another six-12 months before supply chain pressures ease,” IAG Direct Insurance Australia Group Executive Julie Batch told an analysts briefing.

Suncorp reported its first-half net loss ratio in consumer motor was “broadly flat” as pricing increases and management of claims costs mitigated inflation impacts.

Finding solutions: AMA Group’s Andrew Mair

Chief Executive Steve Johnston says the group’s motor business has continued to see some frequency benefits as people have continued to work from home and limit movement in response to the omicron wave and rising case levels in January.

“While we don’t have formal lockdowns, people are travelling less,” Mr Johnston tells Insurance News.

“Patterns of behaviour have changed, Some to the positive and some to the negative in terms of frequency.

“People are less on public transport and are driving their own vehicles, which means more cars on the road, but equally with high case numbers, and people a bit anxious they are not travelling as much. They are bunkering down, or they were through the peak of this infection phase.”

How long that situation persists remains unclear and insurers are monitoring developments. Road travel and crashes may increase and add stresses into the system as public transport use remains low and supply chain issues continue in a possible scenario that could heighten challenges.

Rental car companies are among firms that have been hit by pandemic movement trends on the way down and on the way up. Globally, rental companies that sold vehicles early as leisure and corporate travel collapsed have now found cars are in short supply.

The price of rentals, their availability and the likelihood they will be needed for longer periods of time are among factors insurers have had to take into account.

Allianz’s Mr Adams says domestic claim volumes, excluding catastrophe events, have increased 25% since the height of the lockdowns in the 2020 June quarter as states have eased lockdown restrictions and mobility has increased. But claim volumes are still 10% below 2019 levels.

The increase in claims cost is not expected to normalise until well into this year when the availability of parts and replacement vehicles improves, while traffic volumes and crash trends will be influenced by the severity and infectiousness of new covid variants.

The pandemic and supply chain shortages has led to some calls for fresh thinking from insurers and repairers. AMA’s Mr Mair says greater use of recycled parts is an area where changes could be made.

Some policies require new replacement parts to be used, while recycled parts also seem to have a “cheap and nasty” stigma attached – although they can be as good as original manufacturers’ equipment, he says.

“When a two-year-old BMW gets hit on one side, all the other panels are still very new and there is nothing wrong with them,” he says. “There is an opportunity to take some heat out of the system by using more recycled parts, and from an environmental point of view it is also a win.”

Mr Mair says arrangements between insurers and repairers also need to recognise pressures the sector is experiencing, with many smaller businesses in the industry particularly challenged by volume uncertainties and cost increases.

“A lot of the business practices and models that have worked for insurers and repairers in the past haven’t necessarily weathered the storm well,” he says. “They have not been shown to be as effective in these difficult times as they were in good times.”

Constantly easing travel restrictions and more relaxed quarantine rules are expected to improve local logistical problems and transport delays, although predictions remain fraught, and there are few quick solutions to the difficult issue of skilled labour shortages.

As Australian businesses respond to international developments and manage local variabilities, people awaiting new cars and completed repairs may still experience frustrations for some time yet.