Potential vehicle valuation shock insurers nonplussed

Many vehicles have been sold with big residual or balloon payments, and it is possible that a 'disconnect' between trade guide prices and achieved second hand prices could trouble the short-term insurance industry. FAnews asked some of the domestic motor insurance players for their views.

We've all heard stories about balloon payments on vehicle finance. After religiously paying 59 instalments, the 'forgetful' vehicle owner suddenly remembers that there's one final payment to make. The problem is that prices in the market for second hand vehicles usually don't live up to the optimistic projections of the dealer all those months ago. The final payment on the car is often greater than the second hand value of the vehicle!

A common solution is for the dealer to sell and finance another vehicle and issue a contract that cleverly absorbs the difference between the final payment and trade in value of the old car.

Industry standard

The Mead & Mcgrouther Auto Dealers Guide is used for the valuation of both new and second hand vehicles throughout the insurance industry. The guide publishes a trade and retail price for each vehicle (going back about 10 years) and insurers generally refer to the retail value for their decisions. The figures published in this guide are based on actual sales prices. Since the guide is frequently updated (on a monthly basis) declining trends in second hand vehicle sales are quickly factored in throughout the industry.

The 'value' question

One of the major direct insurers noted that the 'value' question would be more of a concern if the premium was calculated "solely based on the car's value." Most insurers use a number of factors in determining the motor vehicle premium to accommodate age, driving experience, vehicle risk factors and geographic location. The value of the vehicle tends to carry little weight in the overall calculation.

Another factor worth considering is that many more cars are repaired than replaced these days. Aside from the agony of watching one of your 'assets' constantly shed value, there is a benefit to declining second hand vehicle prices. Your insurer will be less likely to have to pass price increases on to you at your next policy review. The reason is the retail value of your vehicle (an input to the premium calculation) will be so much lower.

'Creative' consumers

The biggest 'threat' to insurers is from rogue consumers who try to take the insurers for a ride when they realise that they cannot achieve the 'insured' value on their car by selling it on the second hand market. The temptation to have the car 'stolen' or 'written off' becomes stronger the bigger this pricing discrepancy becomes. "This is a very real threat. However effective claims assessing can combat this. It's also interesting that 'concerned citizens' are aggrieved by such actions and report them to us," said Trevor Devitt of OUTsurance.

Policy 'protections'

In summary, the insurers we've spoken to doubt that major differences between guide and actual vehicle prices are cause for concern. That's probably because policy 'protections' are weighted in favour of the insurers.

"Our claims are settled on reasonable market value – so if retail is not the same as reasonable market value we will pay only the reasonable market value – up to the insured value stated in the schedule," said Lourens Joubert, Head of Corporate and Commercial Underwriting at Santam.