Strange new world for motor insurance
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The ground has shifted for motor insurance, and brokers need to be aware of the potholes in the odd landscape that has emerged
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WHILE YOU were busy with the pandemic, a funny thing happened in the second-hand heavy machinery market.
Rather than the values of trucks, earthmovers or cranes depreciating over time, they started moving in the opposite direction.
Specialist insurer NTI's head of motor, Nick Dendrinos, says that depending on the type of vehicle involved, some specialist vehicles are currently up to 80% more expensive in the second-hand market than they were at the start of 2020.
“This is certainly a dynamic I've never seen before – no one's ever really seen it before,” he says.
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Articulated trucks on register
Moderate negative impact
38%
Significant negative impact
28%
Little negative impact
12%
Over 3 to 20
0.5%
“The imperative at the moment from an insurance standpoint is to encourage our brokers to understand the risk factors surrounding all these different pressures”
Nick Dendrinos,
NTI
It is having implications for the insurance industry, because with most commercial motor insurance policies, insurers generally pay out the lesser of market value or declared sum insured. There is a risk that businesses making a claim will not receive enough funds to replace essential vehicles if the declared sum insured reflects the pre-pandemic market price.
“What we want brokers to do is to make sure their customers are well protected,” Dendrinos says, meaning that policies will need updating to reflect the current market value of many specialist vehicles.
The long haul
Any business hoping the odd phenomenon will be short-term may be disappointed, says Dendrinos.
There are a range of factors keeping demand for specialist vehicles high and their supply limited, which is lifting prices above pre-pandemic levels.
The pandemic has sparked a boom in e-commerce as people shop from home, which has increased the frequency of use of transport equipment as goods are delivered not just to warehouses but to individual homes as well. This trend is continuing as work from home becomes standard practice.
In addition to higher volumes of freight requiring more vehicles to transport goods to more destinations, government support measures such as the instant asset tax write-off have encouraged businesses to buy big-ticket items, placing further pressure on the limited supply of large, specialised vehicles.
Supply chain disruptions mean parts are harder to come by, increasing the value of those vehicles that are still operational. And major manufacturers abroad now have huge backlogs of orders for new vehicles that are waiting for microchip and semiconductor components, preventing new stock from alleviating pressure on the second-hand market.
“A lot of the manufacturers have got waiting periods anywhere from six months all the way up to two years,” says Dendrinos. “I know some big manufacturers in the truck space, they're not taking any new orders for this whole entire year.”
At the same time, inflation in general is impacting the price of a wider range of goods. Even a minor repair costs a lot more now due to scarcity of parts, and constraints on skilled labour.
Work-related accidents or mishaps
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Directors & officers
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Legal fees
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Auto liability
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Property damages and bodily injury
The lack of skilled labour also increases the cost of insurance.
“We don’t have the same pipeline of skilled workers entering Australia that we had pre-COVID. We’re seeing a skills shortage across the board,” he says.
The domino effect
Dendrinos says the domino effect is causing a lot more risk, driving costs up, and resulting in pricing pressure.
“The imperative at the moment from an insurance standpoint is to encourage our brokers to understand the risk factors surrounding all these different pressures.”
Another issue to consider is that many vehicles that are underinsured are also specialised, making it difficult to accurately judge their true market value.
“There are so many different types of configurations. You could have a truck with set trailers doing a specialised job; you could have certain mobile plant equipment that's highly specialised for certain paths to do with mining,” says Dendrinos.
“Specialised transport equipment customers are highly attuned to their own markets and are best placed to work with their broker to determine the appropriate sum insured, considering how market values have increased exponentially”
Nick Dendrinos,
NTI
It is challenging for any insurer to know the true value of the many and varied configurations of machines doing highly specialised, and in some cases unique, tasks.
“We rely heavily on what the customer declares to us or to the insurance broker with regard to the value,” he says.
It is a simple matter if the machine is new with a purchase price to act as a value guide. But once time has passed, and factors such as the difficulty of finding a replacement or the specialised training required for the operator are included, the role of the broker in making an assessment is mission critical.
“Specialised transport equipment customers are highly attuned to their own markets and are best placed to work with their broker to determine the appropriate sum insured, considering how market values have increased exponentially.”
Making an accurate assessment of the value of light vehicles is less of an issue because independent information is available through vehicle identification and pricing information services, but also because many models in a class have the same specifications and use.
Dendrinos recommends that brokers raise some of these issues with their customers at the time of pre-renewal, as there are a lot of unfamiliar dynamics at play that require explanation. Brokers also need to appreciate the sensitivity around approaching the subject with their customers, given that they are likely experiencing inflation pressures and budget constraints across their businesses.
With new factors like the war in Ukraine and mass lockdowns in China, any change in the situation looks remote.
“I don't see this problem going away,” says Dendrinos. “I think it is going to take a couple of years before we return to vehicles depreciating again.”
Year-on-year rise in commercial truck resale values
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Over 20 to 40
Over 40 to 60
Over 60 to 100
Greater than 100
2020
2021
105,137
109,927
Source: Australian Bureau of Statistics 2021 Motor Vehicle Census
Heavy-duty trucks
Medium-duty trucks
April 2020
April 2021
+21.6%
+32.1%
+26.6%
+32%
Source: Price Digests data powered by The Truck Blue Book
Over 3 to 20
Articulated trucks on register
Year-on-year rise in commercial truck resale values
Total GSM (gross combination mass - tonnes) across Australia