By Ray Birch
RIVERSIDE, Conn.—Higher repair costs for newer cars is driving up the cost of auto insurance and ancillary add-on products.
That is adding to the total cost of ownership of a vehicle, and is something lenders need to pay attention to, especially as interest rates rise, said Automotive industry expert Maryann Keller.
“Everything is changing. We have new transmissions, a lot more sensors and microprocessors really dictating the functionality of the car,” explained Keller, principal at Maryann Keller & Associates and a former Wall Street auto industry analyst. “So what insurance companies define as what is covered and repairable is becoming very different today.”
Basic Rates Headed Up
Keller said basic auto insurance rates are already going up as insurers experience higher losses and face larger liabilities as repair costs soar higher (see related story).
“The costs for ancillary products people buy to protect themselves, such as gap insurance and extended warranties are going up as well,” Keller told CUToday.info.
Keller shared an example of how insurers are addressing the new Teslas.
“We have already seen some of the changes with higher insurance rates across the board with insurers now having to look at the cars themselves, instead of simply categorizing the risk in a category of cars in a particular state and driver type,” Keller said. “The AAA decision (to raise rates) on Teslas had to do with the very high repair costs on the car, despite its high level of safety features. Insurers had written coverage on Teslas categorizing the car as a luxury sedan and charging rates accordingly. Now that they have actual repair data, the rates are rejecting this reality (as insurers write coverage on the Tesla vehicles themselves).”
Keller emphasized that as insurers gather more data on damage to newer vehicles that they will raise rates to address the growing liability.
“Gap insurance providers are seeing higher loss severity when a car is in accident and the car is totaled and they have to pay off remainder of the loan,” said Keller. “They are seeing their costs rising and margins contracting, so something has to happen. Gap insurance will become more expensive.”
Extended warranties, too, will rise in price.
Maryann Keller
“Someone takes out a car loan for seven years and you are darn right they want an extended warranty,” said Keller. “They will own that car well into its middle age, so they want the extended coverage.”
What is changing among extended warranty plans is that these insurance companies base their revenue model on knowing from past history—data—that tells them what fails and when on a specific model, explained Keller.
“They are now dealing with this change in automobile technology and determining how it will affect them going forward,” she said. “And I would anticipate that as there is no history to go on with much of this the new technology and the cost to fix it, for example, right now they won’t want to cover a headlight, which is very expensive with its housing. I think a big question going forward with these warranties is what will be covered.”
More Upside Down Borrowers
As rates for gap coverage and extended warranties rise, Keller emphasized the increases are coming at a time when consumers need the extra coverage the most.
“As car prices rise and drive up loan terms, the need for an extended warranty, and gap coverage for the growing number of people who are upside down on their car, becomes even greater,” she said.
Other Stories In This Series
Why More Cars Are Headed To Salvage Auctions
What The High Cost of Car Ownership Could Mean