How auto theft, inflation and vehicle complexity boost claims costs

Late last year, Toronto’s police department wrapped an auto theft intervention, codenamed Project Stallion, that recovered 1,080 vehicles stolen citywide with a combined value of $59 million. That works out to just shy of $55,000 per vehicle.

Auto theft is undeniably a key driver of rising insurance premiums. But behind splashy headlines about cars vanishing from driveways while owners sleep, other factors are in play.

Over much of the past decade, automobile prices rose faster than the rate of inflation, and then pandemic-fuelled shortages sparked new inflationary cycles exacerbating those increases.

Today, these economic and supply chain issues are conspiring to elevate claims costs for repair and restoration, industry sources tell Canadian Underwriter.

“Several factors contribute to premium levels. For instance, a claim doesn’t necessarily mean there will be an increase in premiums for an insured,” says Rosallie Papa-Reid, vice president of national auto claims at Aviva Canada. “Due to current conditions, some provinces such as Ontario and Quebec are feeling the impact of inflation, supply chain issues, thefts…more than others.”

Car complexity and economy factors

Repairs for higher-end vehicles — which require specialized parts and servicing — also push up repair costs. “Current economic pressures such as inflation, supply chain disruptions, labour shortages, etc., along with rising theft, will also continue to impact auto insurance claims and repair costs,” Papa-Reid tells CU, adding a return to pre-pandemic driving patterns is increasing claims frequency.

“The industry expects inflation and claims costs to remain high. Auto insurance rates will always reflect the claims experience, so when we see significant or sustained increases, it is likely customers will also see impacts to their premiums in the next renewal cycle.”

Economic factors beyond the control of insurance customers are the largest drivers of premium hikes, says Paul Gilbody, president of ClaimsPro Canada.

“The inflation rate on certain car parts, on rental cars, on labour charges associated with fixing certain cars, have been significantly higher than the Bank of Canada rate of inflation that’s quoted. That has had a huge impact on insurance premiums right across the board,” he says.

Shortages of repair-sector labour and parts supplies — particularly for imported vehicles — are also making a huge impact. That’s because a lot of higher-end cars tend to be built in or source parts from Europe and Asia.

“Some imported cars, like Mercedes, BMW, Jaguar, have had a bit more of a hit simply because of the supply chain for parts,” Gilbody explains, adding domestically produced vehicles, even from foreign manufacturers, aren’t as affected. 

Spare parts problems

The need to import key parts when supply chains face disruptions can have disproportionate impact on repair costs.

“What was in the past a two-week repair job, depending on the availability of parts, may now take anywhere from four to six weeks,” says Julian Bugeja, senior vice president of NFP Canada’s private client group.

“If the parts are taking longer to be shipped to the repair shop or the garage, that delays the process, which can increase the rental car expenses to the carriers.”

This means insureds must factor in longer, more expensive rental periods for substitute vehicles.

“One risk we’re seeing is some customers don’t always carry the right rental coverage limits for high-end vehicles,” says Papa-Reid. “And given the challenges of repair times, which are longer than we’ve historically seen, it’s affecting costs.”

Brokers should have a conversation with clients about rental car coverage, since repairs can take longer than the loss of use coverage in the policy, notes Bugeja. Plus, any rental costs beyond a certain time-period become the client’s responsibility if they’re at fault for the collision.

“We always point this out to our clients, especially nowadays,” he says.

This article is excerpted from one appearing in the February-March 2024 print edition of Canadian Underwriter. Feature image courtesy of iStock.com/oversnap