Auto Claims & COVID: Longer Term Impacts

We have discussed the short-term impacts of COVID-19 on claims frequency in past articles. Now, as we see vehicle miles traveled and claim frequency rebound, it’s time to look at some longer-term impacts of the pandemic on auto claims. When looking at the longer term, it involves the new vehicle sales trends on the aging of the car park in the U.S.; as well as what changes financing and leasing will have on total loss settlements.

Looking at new vehicle annual sales, the industry has bounced back from the initial Seasonally Adjusted Annual Rate (SAAR) of 13.1 million sales. That volume was significantly below 2019’s 17.1 million sales. By August 2020 the SAAR had been revised twice and is now at 15.1 million new vehicle sales. Currently, the average age is 11.9 years old, and that should remain steady until mid-2021.

Just under 70% of new cars are financed with loans, carmakers aggressively lowered interest rates and raised loan terms, so that in 2020, 0% finance deals accounting for 25.8% of dealership-financed new vehicle purchases and many of these loans carried a term length of 84 months. Down payments also were down to an average of 11% of the vehicle price. Motivated dealers closed deals with a record amount of trades with negative equity; the share of new sales with a trade-in involving negative equity hit 44%, and the average amount of negative equity reached $5,571—both all-time highs. While these auto claims trends should cause financiers to lose sleep, there are some bright spots:

Though the average amount financed in new vehicles increased by almost $5,000, the average loan term was steady at 77 months.
The average APR is down significantly from 7.3% to 4.7%, due to the more attractive financing offers from automakers right now.
The lower average APR meant that the average monthly payment increased only $15.
Average total interest paid over the life of a loan financed in April 2020 is nearly $3,000 less compared to the average one year ago, which helps eat into the negative equity brought to the new loan.

Settling total losses have long been a challenge in auto claims. The carmakers push to revive new vehicle sales in the wake of the pandemic and consumers’ willingness to stretch finances have made that challenge even larger.