January 2023 Market Update – Motor, Plant & Equipment

The ripple effect of economic pressures such as inflation and interest rate hikes, coupled with geopolitical conflicts (war in Ukraine) and continuing global supply chain disruptions, has created the ‘perfect storm’ for the automotive industry, which has impacted Australian businesses and influenced consumer behaviour. This has had a ‘flow on’ effect to motor insurance premiums and claims.

Consumer demand for used vehicles and machinery continues to grow as a result of the lack of new vehicle inventory caused by shortage of semiconductor chips and manufacturing disruptions. The scarcity of semiconductors continues to cause prolonged vehicle production delays which has created increased demand and put pressure on costs and prices for used parts, vehicles and machinery in the market including rising costs of repairs and servicing of same.

The automotive industry is facing an additional supply chain issue of copper wire harnesses used in induction motors because of manufacturing resources being based in Ukraine and reduced production rate caused by the Russian invasion. Russia’s war on Ukraine has also led to production losses and interruptions whereby auto manufacturers are facing increased prices of raw material including, fuel, oil, energy and logistic costs across the European Union.

Widespread labour shortages within Australia have also contributed to rising inflation concerns. The lack of available skilled labour/technicians has had a direct impact on the automotive sector including mechanical and collision repair businesses which has been exacerbated by the pandemic (lack of skilled migrant entrants due to border closures), resulting in a competitive local labour hire environment, leading to subsequent wage inflation (to retain skilled staff), rising operational costs for employers / businesses and increased insurance claim settlements (due to increased repair costs).

Insurers have also been impacted by large losses due to the number and severity of extreme weather events experienced across Australia over the last twelve months, most notably hailstorms in Canberra in March 2020 and in Southeast Queensland in November 2020 which has affected motor insurance claim pay outs and replacement costs of vehicles.

It is important for policyholders to take the following steps to mitigate heightened premium costs, coverage restrictions and underinsurance:

Assess current policy limits and basis of settlement conditions to avoid the risk of underinsurance, i.e., review whether vehicles are insured at market value or agreed value. Agreed value policies have traditionally attracted higher premiums as they provide certainty relating to payouts (considering year on year vehicle depreciation) however, some policy holders have been left out of pocket with their market value policies due to rising inflation pressures and high demand of used cars driving up the purchase price of second hand vehicles.

Establish and implement formal driver training and risk assessment programs to reduce risk of collisions, identify high risk drivers and protect your business’ motor vehicle fleet assets. Include driver training for existing staff and at time of onboarding new recruits.

Adopt risk mitigation strategies in your business processes that enable you to manage small or non-complex accidents (such as setting aside emergency funds to deal with excess claims inflation), thereby allowing you to carry a higher policy excess on your motor or fleet policy. Higher excess’ yield premium savings for policyholders.

Incorporate technologies such as telematics and dashcams to existing vehicles and fleet to reduce risk exposure and collect evidence for a claim to reduce costs.

Accelerating technology advancements such as the use of artificial intelligence (AI), software and automation is reshaping auto products and services. As businesses and consumers swing from petrol to electric vehicle options, the ‘shift of risk’ will move from drivers to the AI software behind driverless cars and machinery. However, many consumers are still holding back from transitioning to electric due to the lack of available charging infrastructure and vehicle options.

Telematics (also known as black-box or usage-based car insurance) may be a way of the future; where insurance companies rely on technology and data to tailor rates and premiums based on driver habits. In-car tracking devices will typically monitor driver habits and insurers can offer reduced premiums in return for good behaviour and practices behind the wheel.