Global “stagflation” and what this means for replacing your car if stole or written off

With prices of both new and used vehicles remaining ‘on the up’, can you afford to replace your vehicle if stolen or following an accident – even with car insurance cover? Here’s how to read the current local car market as things stand in 2023.

According to TransUnion’s most recent VPI (Vehicle Pricing Index) from the last quarter of 2022, the prices of new and used vehicles remains on the higher end.

According to the report, price inflation for new vehicles increased from 3.8% during the third quarter of 2021 to 6.8% during the third quarter of 2022 – that’s almost double! While below the country’s overall inflation rate (of around 7.6%), this is still steep for vehicle consumers. In the used car space, the increase year-on-year is even steeper – increasing from 6.8% in Q3 of 2021 to 9.0% in Q3 of 2022 and well above general inflation.

Notable purchasing trends and the effect of ‘stagflation’

The Q3 VPI report notes that South Africans (those who are in the market for new vehicles) are tending towards the purchase of cars between R200,000 and R300,000 – due in part because of supply chain challenges in the used car space, making them more expensive to purchase.

It also indicates that post COVID-19 supply issues, the new vehicle market is possibly starting to “stabilise”. However, the market is not expected to grow all that much beyond pre-pandemic levels. This is attributed to consumer spend cutting because of increasing interest rates and overall inflationary pressure on people’s pockets.

According to recent reports, NAAMSA (The National Association of Automobile Manufacturers of South Africa) has indicated that there is a close correlation between new vehicle sales and South Africa’s GDP growth rate. As such, the automotive business council feels that growth will remain in the single digits this year. The depreciation of the rand is also a factor contributing to sharp increases in new vehicle prices. “The optimist in me would like to see this not be the case and rather experience a thriving vehicle sales market,” adds Discovery Insure Head of Value-Added and Ancillary Products, Kgodiso Mokonyane, when analysing these trends.

This has prompted the term, “stagflation”, which defines high interest rates and inflation combined with slow growth.

“It would appear that global supply chain challenges across the motor industry are beginning to resolve, or at least stabilise,” says Discovery Insure Chief Executive, Anton Ossip. “While supply is largely now available, increasing demand may likely become the next challenge for car dealers,” he adds. “This will impact consumers looking to purchase vehicles with rising inflation and interest rates, as well as fuel prices to contend with as well.”

“Then there’s the subject of load shedding,” adds Ossip. “This is having a significant impact on production and component manufacturing in the country, which certainly doesn’t help things.”

The used car market also remains under pressure this year. Quality stock is seemingly on the decline and the price of used vehicles is also on the up. This and the fact that more South Africans are hanging onto their cars for longer. The latest VPI report has also indicated that the used-to-new ratio of vehicles sold now stands at 2.1 (i.e., financial institutions are effectively now financing 2.1 used cars for every new vehicle being sold).

How does all this affect car insurance cover?

Simply put; if you needed to replace your car following an accident or total loss due to theft, your insurance cover may not be sufficient and come at an extra cost to you.

“It’s more than likely that the replacement value of your car will be higher. This means that as a client, you’d have to pay in an amount to get even the exact same vehicle and model you had,” says Ossip.

“The COVID-19 pandemic impacted global inflation in a significant way – through shipping and manufacturing delays. This impacted vehicle costs – new, used and the production of parts for repairs and replacements across all vehicle brands and parts. And it hasn’t taken long for this to negatively impact consumers and us as an insurer, directly.”

“A mere two years later, we noted that car inflation was four times higher than the previous year. This effectively means that a client’s vehicle isn’t likely to be replaced at the same value using the payout they’d receive on their current cover plans,” he explains further.

That’s why Discovery Insure has introduced a benefit to car insurance clients that comes at a minimal additional cost on premiums to save significantly when it comes to such claims down the line.

“Clients can opt into adding at least 7% of their premium each month to receive a minimum 15% boost through the Retail Value Booster Benefit. Clients can also opt into an alternative 25% boost on the benefit – also at minimal additional cost,” explains Mokonyane.

“What this benefit does is boost the retail value of a client’s vehicle by either 15% or 25% where there is a total loss. That is, theft of a vehicle or accidental write off. Clients can choose their percentage option based on what suits their individual needs.”

How does Discovery Insure’s Retail Value Booster work?

One factor to consider is how old your vehicle is.

Clients who have a new vehicle that is less than 12 months old (from the date of first registration) can process a claim if their car is stolen or written off. “We will pay out the value of the client’s vehicle so that they can replace it with a similar make and model,” Mokonyane explains.

Clients who have a vehicle that is older than 12 months will be paid out the retail value – as captured at the date their vehicle was stolen or written off – as well as the boost amount that they’ve opted in for (15% or 25%).

“This benefit is an innovation that will help clients better manage the risk of a total loss without being at a loss themselves – in other words ‘out of pocket’ at the point of claim. The added boost accounts for inflation costs sufficiently so that clients do not run the risk of experiencing this at a time they least need to worry about the rising cost of vehicles in today’s market,” Ossip concludes.

To learn more about Discovery Insure’s Retail Value Booster or visit the Discovery website: www.discovery.co.za