Rising number of total losses hurts industry

Many factors put repairers in a total quandary.

During the past 10 years, an overall decline in collision insurance claims and a dramatic increase in the number total loss declarations have had devastating consequences for the collision repair industry.
Between 2000 and 2005, by most estimates the percentage of total loss vehicles doubled, and nearly a fifth (or more, depending on who you ask) of all cars involved in a claim are now declared total losses.

While there appeared to be a decline in totals after 2004, data from Audatex indicates that totals are on the rise again, fueled by the decline in used vehicle prices, increasing raw materials costs, an aging vehicle population and the expense of properly replacing airbags. That trend is expected to continue in 2009.

Consultant Karen Fierst, of KerenOr Consultants, questions whether or not the number of totals ever really stopped climbing, because the data from the information providers “was based only on totals for which estimates were written,” Fierst says.

In fact, the actual number of total losses is probably north of 20 percent if you include obvious totals, where an estimate was never generated.

With repairers fighting to make a profit on fewer and fewer jobs, many are asking if anything can be done to stem the tide of total losses. A few solutions have been floated that could possibly reduce the number of totals, from increased use of aftermarket parts to salvage airbags and new bumper height regulations. Unfortunately, many of the factors that have contributed to the increase — declining actual cash values, and the increasing expense of advanced safety equipment — are beyond the control of repairers and insurers.

Actual cash values
One key factor that has driven up the number of totals is strictly an economic one: the cost of repairs is increasing, while the actual cash value (ACV) of many vehicles on the road is declining. Insurance companies will typically total a car once the cost of repairs reaches or exceeds 70 percent to 90 percent of ACV. Increased salvage vehicle prices also have contributed to the problem, as has the increased age of vehicles on the road.

“A lot of this is really due to the cash value of the vehicles,” says Steve Nantau of Ford, who chairs the Collision Industry Conference’s Vehicle Reparability Committee. “The cash value is dropping and salvage values are increasing, so you are going to see more totals. A lot of salvage vehicles are repairable, but not from an insurance company standpoint.”

Wholesale used vehicle prices improved slightly in January, according to the Manheim used vehicle value index, but the year-over-year decline is still 6.8 percent. A significant decrease in the value of full-size pick-up trucks and SUVs has made it easier to total one of those vehicles for even a minor collision.

These calculations can lead to some confusing and frustrating outcomes for drivers and repair shops. An older vehicle with minor damage might wind up being totaled, while a newer car with extensive damage may not meet the financial threshold for a total. In the current economic climate, drivers who hold on to their older vehicles are faced with the prospect of either buying a new car, or buying their current vehicle back from the insurance company with a salvage title and paying for the repairs.

“It’s traumatic when people come in with total losses,” says Diane Rodenhouse, owner of Rodenhouse Body Shop in Grand Rapids, Mich. “They don’t have the money to get a new car, they can’t get credit, and a lot of times they have less insurance than they thought. I feel sorry for them.”

The cost of safety
Cars are safer and more fuel-efficient now than ever before, but also significantly more expensive to repair. New vehicle designs, airbags, exotic steels and complex technology have made collisions (especially front-end collisions) much more costly.

“Vehicles are increasingly designed to protect the passengers, and to crush,” says Dave Snyder, vice president and general counsel at the American Insurance Association (AIA). “You also have more electronics in the front of the car.”

“That results in higher claims costs and slightly higher insurance premiums,” says Dick Luedke, spokesman for State Farm. “However, you have to weigh that against the benefits of safety. These new technologies are saving lives. We’re interested in doing whatever we can to help promote technology that’s more easily repairable, but not at the expense of making safety technology less effective.”

No one is lobbying for less safe cars, but repairers and insurers alike believe that OEMs could do a better job of making vehicles easier and less expensive to repair by moving expensive computer components away from the front of the car, or limiting the damage to instrument panels and windshields caused by airbags.

“There’s this perception that manufacturers are building vehicles that can’t be repaired,” Ford’s Nantau says. “The amount of damage sustained in a relatively low-speed collision is probably more than what you saw back in 2000, but the fact is that cars are much safer than they were in the past.”

That said, Nantau says that OEMs do have their engineers evaluate vehicle design with an eye toward the total cost of ownership, including the cost of insurance. The design of the new Mustang, for instance, was influenced by a desire to make the car best-in-class on insurance rates.

Others think the OEMs could do more, particularly when it comes to the vehicle’s front end.

Low-speed crashes can result in pricey repairs. In its crash tests of luxury cars, the U.S. Insurance Institute for Highway Safety (IIHS) found that these repair costs could range from $5,000 to nearly $14,000, depending on the model. Non-luxury mid-size cars required repairs that cost between $4,000 and $9,000. According to IIHS, design flaws in newer vehicle bumpers make them less effective than they should be. Many of these bumpers don’t line up vertically, so they don’t engage during a collision, and the bars underneath many bumper covers are not big enough or strong enough to provide adequate protection.

That lack of protection is especially galling to vehicle owners when they find out how much replacement parts cost. The headlamp for a Lexus ES, for instance, costs more than $1,000 to replace.

IIHS has recommended that car manufacturers make their bumpers wider to better protect the vehicle (an idea the AIA supports). If a bumper bar does not extend far enough, the study found, a minor corner impact could cause significant damage to lights and other safety-related components. Bumpers also have to engage properly to minimize damage.

IIHS called for changes to federal rules that govern bumper height, which don’t apply to minivans, pickups or SUVs. The disparity in bumper height among these vehicles further exacerbates the problem of bumper match-ups during collisions.

Honda’s Collision Impact Kit program is another possible solution. The program provides a discount on parts purchased as part of a repair package. The initial offering (for front-end collisions) reduced parts’ costs by nearly one-third.

The airbag problem
Replacing a set of airbags with new OEM modules can cost up to $2,000, and many repairers consider airbag replacement one of the biggest reasons that totals have increased in the past decade.

The salvage industry has suggested using non-deployed airbags from salvaged vehicles as a possible solution. These airbags are considerably cheaper than new modules, and the Automotive Recyclers Association (ARA) has come up with a voluntary certification program (ARAPro) to help ensure their safety.

Repairers, however, remained concerned about safety and liability issues when it comes to salvage airbags. “Every car we work on, we’re held liable for,” says Gary Wano, chairman of the Society of Collision Repair Specialists (SCRS) and owner of G.W. & Son Auto Body Shop in Oklahoma City. “I’m not saying they are not a good way to save money, but until somebody tells me they will take on the liability, I’m not in the market for them.”

Nantau doesn’t think airbags alone are responsible for the increase in totals.

“Use of salvage airbags, in itself, is not going to save a total in most cases,” Nantau says. “When an airbag deploys, there are going to be a lot of other parts affected that need to be replaced — a windshield, instrument panel, sensors, trim pieces or even seats, in some cases. Those other parts, altogether, will exceed the cost of the airbag when you look at the labor to install them.”

There also is an argument that increasing the value of salvage airbags will push salvage values up, and indirectly cause an increase in totals.

Aftermarket parts
Using less expensive aftermarket parts also could help reduce totals, particularly for older vehicles. Many repairers, though, have resisted aftermarket parts because of quality issues with some manufacturers.

The National Association of Insurance Commissioners (NAIC) recently asked the Diamond Standard Brand Alternative Safety Part Division of Reflexxion Automotive and Production Bumper Stamps to re-examine its model laws governing use of aftermarket parts. According to Diamond, just 20 states have regulations that cover equivalency or like-kind quality in aftermarket parts

It’s important to have quality aftermarket parts that can replicate the OEM components, otherwise those parts won’t perform the same way in a collision, leading to even more totals, said Mike O’Neal, Reflexxion’s president,

“If an OEM part is roll formed in one piece, then the aftermarket part has to be made the same way,” O’Neal says. “If you don’t use the proper materials, the part is not going to perform the same way.”

OEMs, led by Ford, are trying to block the importation of some of these parts by claiming patent infringement. In 2006, the International Trade Commission ruled in Ford’s favor, barring the manufacture of aftermarket version of certain parts for the F-150.

“We’d like to work with the repair industry to support the availability of aftermarket parts, which is now under incredible assault from the OEMs,” AIA’s Snyder says. “As repair parts prices go up, that brings on more totals. That should be an area of cooperation in legislative advocacy between our industries.”

The Ford case is being appealed, and last year legislation was introduced in the U.S. House of Representatives that would have exempted component parts from design patent infringement liability. The measure didn’t pass, but it may be reintroduced in the current session.

“Good aftermarket parts have their place in the market,” Rodenhouse says. “I have no problem using aftermarket parts on older vehicles if they’re good parts. You can avoid a total that way.”

If the OEMs are successful in blocking aftermarket parts using international trade laws, then the price for parts could further increase.

“There needs to be reform of the patent legislation,” O’Neal says. “What the OEMs are trying to do is create a monopoly.”

But there is a limit to how much help repairers might get from these parts.

“Anything that is going to drop the dollar figure on the repair is going to give us some assistance,” says Wano. “But I can’t see that there is an opportunity to utilize any more alternative parts than we’re already using. From a repair standpoint, the insurers are pushing hard to use as many aftermarket parts as possible, and we’re still seeing a lot more total losses.”

Repairers also could use more salvage parts, but demand from overseas both for parts and scrap metal has made these components more expensive and scarce. This increased demand for parts has pushed up salvage vehicle prices, which has only helped fuel the increase in total losses.

While the use of aftermarket parts, combined with design changes from the OEMs, could help lower the number of totals, there is no short-term fix to the total loss issue, particularly while the value of older cars continues to decline and repair costs rise.

“People are driving less, and there is more accident avoidance technology in the vehicles,” Fierst says. “So we’re already seeing fewer claims. Then you add on the cost of repairing the accident avoidance equipment, and there’s no question you are pushing the limits of what’s going to be totaled. That combination of a decrease in claims and an increase in totals is going to be a dramatic driver of the shrinkage in the collision repair marketplace.”

Auto Body Repair News March 6, 2009

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