Minor fender bender? That will be $42,000, please

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Modern cars are marvelous, except when they need fixing — in which case the bill for even a seemingly minor dent can easily reach four or even five figures. Consumers and fleet owners are being stuck with huge repair bills while auto insurers are hiking premiums. Regrettably, this type of inflation could prove very sticky.

There isn’t a simple explanation for why car insurance prices have suddenly gone through the roof: Soaring used car values, an uptick in dangerous driving, rising theft, spare part and technician shortages have all contributed to insurers’ burgeoning losses. Another less-explored issue is the increasing complexity of fixing vehicles; and, unlike some of those other factors, that won’t change once supply chains and labor markets revert to normal.

New models — whether powered by combustion engines or electric batteries — have essentially become very expensive computers on wheels, sometimes containing as many as 3,000 semiconductors. This is wonderful from a safety and driving performance perspective, but replacement parts cost more and modern vehicles take longer to fix.

“If you think about the number of sensors, cameras and the technology embedded in vehicles today, that is driving a significant increase in the underlying cost of repair,” Leah Stearns, the chief financial officer of salvage auction company Copart, told investors earlier this month. “So if you do get in an accident, a lower level of damage actually could effectively result in the car being totaled.”

In the UK, the cost of vehicle repairs paid for by insurers jumped by one third in the first quarter; Direct Line Insurance Group warned last month that adverse damage claims would continue to pressure earnings this year. No wonder UK car insurance costs jumped by a staggering 43 per cent year-on-year in May, according to official inflation data published this week.

Why are car insurance premiums rising?

In the US, car repair prices are increasing at a 20 per cent annual rate, or around five times the overall rate of inflation. One of the better performing auto insurers, Progressive, last month blamed higher than anticipated costs to fix cars for a deterioration in its underwriting performance, adding it would be “aggressive” in raising customer premiums.

The average number of parts replaced per insurance claim has climbed to 13 from around 10 since 2017, while the average total cost of of collision repairs has jumped 45 per cent to $4,200 during the same period, according to a report by auto repair and insurance software company CCC Intelligent Solutions Holdings. Meanwhile, the average length of repairs has swelled to 16 days from 10 since 2019. The longer a vehicle is in the repair shop, the more an insurer must pay for a courtesy car.

These days, even humdrum parts like mirrors and fenders contain complex sensors. A replacement windshield that once might have cost as little as $300 will now set you back more than $1000 if it has technical features such as a head-up display. A replacement headlamp can cost as much as 8 per cent of the value of the entire car.

“The more technology you add to avoid or reduce the severity of an accident, the more expensive components there are in peripheral areas of the vehicle,” Adrian Watson, head of engineering at Thatcham Research, told me. “Getting the balance right is hard.” (Thatcham was established by the insurance industry to safely reduce the cost of claims.)

Auto electronics may also require diagnostic scans and recalibration following a crash, adding several hundred dollars to repair bills. “It’s not just inflation, it’s really the average repair today has more labor hours on it and likely more calibration on it than an average repair did even two years ago,” Tim O’Day, the chief executive officer of Canadian collision repair chain Boyd Group Services, told investors last month.

Tech-enabled functions like automatic emergency braking and reverse parking cameras can help drivers avoid minor scrapes. Yet a hailstorm, theft or collision might still result in the vehicle being damaged.

If that happens, repair costs can be enormous, particularly if the automaker is inexperienced and has made suboptimal design choices. Consider the bill one customer received for repairing a Rivian Automotive pickup truck after it was involved in a low speed rear-end collision in February. Originally estimated at $1600, the final cost came to an eye-watering $42,000, which isn’t far off the price of the average new car.

Insurance premiums for electric vehicles

I’m no opponent of electric vehicles, but they can be up to 50 per cent more expensive to repair than a combustion engine equivalent. Not only are EVs generally more expensive to purchase in the first place, the battery accounts for a large chunk of that value. “Even a small accident could be costly if the battery is involved,” State Farm, the US’s biggest car insurer, warns clients on its website, noting that a replacement battery might cost $15,000 not including labor. On average, insurers charge 12 per cent more to insure an EV, but Bloomberg Intelligence analyst Kevin Ryan says premiums may still not be high enough given the additional risk.

To offset the battery weight, EV bodies also use more expensive, lightweight materials. And, depending on the model, the battery may be integral to the vehicle structure, making it harder to replace. “Batteries are in effect the costliest spare part in the history of motoring, yet their repairability isn’t always given enough consideration when EVs are being designed,” says Thatcham’s Watson.

Many repair shops aren’t yet accustomed to fixing EVs and rigorous inspection is required if damage is suspected, which isn’t easy. A recent Reuters investigation found that even lightly damaged EVs are often being written off. Tesla resorted to launching its own insurance arm in 2019 so customers can avoid the high premiums its customers are often quoted by third-party insurers.

My two cents: Automakers need to focus on building cars that are not only clean and safe, but also don’t cost a fortune to fix when something goes wrong. Even “small changes in design of the bumper” can have an “enormous” impact on the repair cost, Elon Musk told Tesla investors in January. I’m also in favor of drivers being allowed to use cheaper, third-party spare parts, something car manufacturers have long resisted, purportedly on safety grounds. Happily there are moves afoot on both sides of the Atlantic to allow that.

It will be a long time before we’re all whizzing around in driverless cars that never crash. In the meantime, vehicle owners should brace for their car insurance premiums and repair bills to remain high.

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