The ins and outs of vehicle under-insurance

How to protect yourself from the financial ramifications of not having sufficient cover for the full cost of a claim

Rocketing used car prices, inflation and parts shortages could mean that vehicle owners are significantly underinsured if they do not review their sums insured and align them to the changing market dynamics.

“There are a number of important market factors at play which require careful scrutiny of how this will impact the insured and replacement values of your vehicle should you need to claim as a result of accident or total loss, as well as the terms of your car hire while your vehicle is in for repair,” explains Mandy Barrett of insurance brokerage, Aon South Africa.

The hangover of disrupted supply chains from the pandemic remains and is further exacerbated by the Russia-Ukraine conflict as well as the devastating KZN floods which caused huge losses, notably for vehicle manufacturers as well as critical commodities. Shortages in components like semiconductors means that there simply are not enough new vehicles available to meet the demand in the market. This shortage of new vehicles has had a direct impact on the price of used vehicles, which have climbed to record highs. According to the latest Vehicle Price Index (VPI) report released by TransUnion, used cars continued to increase in price in the face of changing consumer demand and supply, with the used VPI increasing from 3.7% to 7.9% in the same period.  Consumers are increasingly holding on to their vehicles for longer as they become increasingly difficult to replace, which in turn is driving up the cost of used cars.       

“This means that if your vehicle is stolen or written off, you could be paying a lot more for a replacement vehicle of similar condition and mileage now than you would have paid a year or two ago.  The reality is that an insurer will pay out according to the Auto Dealers Guide, however these values may not be accurate given the current market factors which are serving to inflate the price of second-hand vehicles.  The same dynamics are impacting the availability of spare parts needed for vehicle repairs – supply chain disruptions, commodity shortages, inflation and exchange rates are all culminating to create a recipe for under-insurance that could leave you out of pocket and having to settle for less should your vehicle be written off,” explains Mandy.

Aon advises vehicle owners to do their homework and get an idea of the retail prices of their vehicle at today’s prices.  A market exercise polling used car prices from local dealers will provide a good sense of the retail price of the same model in similar condition and mileage.  If you compare these retail prices with the insured value of your vehicle, and find that you are underinsured, then it is crucial to engage with your broker or insurer to make provision for the increased retail value of your vehicle, at today’s prices, should you need to replace it. 

“Another important consideration is the mileage and condition of your vehicle – over the last two years many people have worked from home and travel has been heavily curtailed, which means your mileage is likely to be a lot lower, and the condition of your vehicle is also likely to be much better.  This has a material impact on the value of your vehicle – if you had to replace your vehicle now for something of similar condition and mileage, you may well find that you are unable to do so based on a like-for-like basis, and may have to settle for less than expected,” explains Mandy.

Aon provides some valuable tips of what to consider when revisiting your motor insurance given the current market dynamics:    

• Do the market research: Check the current value of your insured vehicle according to the Auto Dealers Guide versus what the retail price is of your vehicle if you had to buy it today from a used car dealer.  You may find a significant discrepancy between the two values which warrants a review of the insured sums on your policy.
• Price of spares and availability: Parts availability and costs are also under-pressure. According to data released by Audatex which tracks vehicle parts inflation, some vehicle brands have seen parts inflation as high as 15,8% in March 2022 compared with March 2021. This also means that the cost of vehicle repairs to insurers has gone up significantly and is likely to have an impact on insurance premiums for vehicle owners.
• Hire vehicles are in short supply: Car hire benefits are common in many motor insurance policies – both for individual and business covers – to cover you for transportation while your vehicle is in for repair. However, there is a significant shortage of hire cars in an industry where fleets were dramatically reduced by around 50% as a result of the economic impact of the pandemic. If you are planning on doing any non-essential repairs to your vehicle such as fixing minor dents and scratches, first check whether a rental vehicle is available before booking your vehicle in for the repair. With the shortage of car parts, check when the parts will be available for any required repairs and plan your way around this in terms of how long your vehicle will be out of action. 
• Don’t assume you are covered for everything: Certain events are not always automatically covered on a standard motor vehicle insurance policy, such as scratch and dent cover, tyre cover, hail damage cover as a few examples. You may need to purchase these covers at an additional premium. Finding out that hail cover was excluded on your policy after a hailstorm has done a swiss-cheese number on your car can prove financially devastating. Likewise, remember to specify any add-ons to your vehicle that are not standard features on the vehicle such as leather upholstery, mag wheels, sound system, two bar, canopy and additional lights and so on.  These all add additional value to the vehicle and need to be accounted for in your sum insured and are likely to cost more to replace now than when you installed them, thanks to inflation.

“An increasingly tougher global economic climate, rising inflation, supply chain challenges and a hard insurance market are increasing the potential of underinsurance, so it’s incredibly important to pay closer attention to the replacement values of your assets if a claim is triggered. When it comes to shopping for insurance, there’s no beating the help and guidance of an expert insurance broker to protect your best interests, point out all the important aspects of your cover, ringfence any exclusions or conditions and highlight what the general market trends are.  They are also adept at negotiating with your insurer to get you the cover that you need.  Given the rapidly changing market dynamics, meeting with your broker to reassess your covers and plug any holes for potential underinsurance is likely to be one of the most financially important exercises you’ll do this year,” concludes Mandy.