Strong used car values put motorists at risk of underinsurance

Vehicle owners have been warned that the recent strong increase in used car values may have left them underinsured, placing them at risk if their vehicle is written off or stolen.

The rise in used vehicle values has been driven by a shortage of new vehicles caused by, among others: pandemic-induced supply chain disruptions; the shortage of semiconductors for new vehicle production; and fewer used vehicles coming into the market from the vehicle rental industry, following its drastic defleeting during the pandemic lockdowns.

Read: Used car prices surge as hard-pressed consumers hunt for ‘bargains’

Vehicle purchasing company getWorth said its team conducted an in-depth comparison of actual used car market prices against insured values and “the results are alarming”.

How ‘alarming’, and why?

getWorth said insurance values have not kept pace [with used car values] since the pandemic began and car owners experiencing a total loss could find their insurance payout well short of the replacement cost of a similar car – in some cases by hundreds of thousands of rands.

Mark Ridgway, chief technical officer at getWorth, said when insurance companies insure cars and there is a total loss – the car is stolen or written off – they need to decide on a rand amount to pay out.

He said the approach varies between insurers, but the most common is to use the “book value” of the vehicle.

Book values are however based on long-term trends, whereas the used car market has been severely affected by the pandemic. Used car prices have increased rather than fallen.

“There are many cases where the current market values are out of sync with the long-term book levels,” said Ridgway.

Read: Pre-owned vehicles selling for more than book value – Motus CEO

The go-to source for used vehicle values is the TransUnion Auto Dealers’ Guide, previously known as the Mead & McGrouther Auto Dealers’ Guide.

The start of the end of depreciation slowdown?

Kriben Reddy, head of TransUnion’s Auto Information Solutions for Africa, confirmed on Tuesday that there has been a slowdown in used vehicle depreciation over the past 18 months.

But he said they are now picking up some level of normalisation because the rate of increase in new vehicle pricing has also started to reduce by a couple of percentage points.

“When that differential between a new and used vehicle becomes smaller, consumers start to shift because the value proposition is far greater on a new vehicle if the pricing is down,” he said.

Book value versus actual

Ridgway said the increase in used car values is not evenly spread.

The book value of a Ford EcoSport with average mileage will be reasonably in line with the current market value.

The insured value of a Toyota Land Cruiser 200 based on book value will however result in the owner being “probably deeply underinsured by 15% to 30%”.

Ridgway also warned about the mileage effect on used car values, which is a value based on an average mileage for a used car of a certain age. A six-year-old car, for example, is assumed to have about 100 000km on the clock.

Lower mileage cars have a higher market value.

“For example, a 2016 BMW X5 xDrive30d M Sport with 100 000km would retail around R600 000. The same car with only 50 000km on the clock would retail at or above R700 000,” he said.

“Mileage makes a big difference to price, especially on newer cars or luxury models.”

Book value useful, but not definitive

Reddy said TransUnion collects actual sales invoice data from across the industry from reputable dealers for its guide.

This includes a description of the car, its mileage, condition, what the dealer paid for it, any type of reconditioning that may have occurred before it was resold, such as the replacement of tyres or windscreen, and the price the dealer sold it for.

He said TransUnion then puts this raw data through a process called normalisation to obtain an average selling price of a specific derivative of a vehicle with average mileage and average condition.

Reddy said the guide contains adjustments on that vehicle, adding for example that if a car’s mileage is below average for that year model, the base average price can be adjusted upwards by between 5% and 13%.

“Based on our adjustment, if you use a combination of mileage and condition without factory fitted options, you can increase the base average value 16% above the average.

“The mileage is the single most important input into pricing,” he added.

The exception to the norm

Reddy also said that the current situation is an exception and in a normal cycle the averages are maintained, but that in the current environment, the book value of a vehicle will almost always be adjusted upwards.

He attributed this to the demand for used vehicles and the pricing being up, and that people have not been driving their cars for the last about two years, which by default means the mileage and condition will be better.

“The problem is that insurers don’t necessarily proactively go to their customers and say market conditions have changed and their vehicle’s replacement value might be a bit higher [and suggest] they take a top-up or adjust their premium accordingly because they might be at risk of being underinsured.

“Equally, not all consumers proactively do that,” he added.

Ridgway stressed that underinsurance will only affect incidents where there is a total loss of the insured vehicle and not claims for “a fender-bender or damaged windscreen”.

He advised vehicle owners to request the insured value on their cars in the event of a total loss from their insurance company or broker – and to then do some research to check if it is reasonably in line with current market prices.

“If it is out of line, ask your insurer if they can adjust the insured value,” he said.

Reddy recommended that consumers check the market value of their vehicle at least once a year to ensure they are not underinsured – or overinsured.

He said consumers can check the insurance and trade-in value of their vehicle through TransUnion’s mobile application or the website The first report is provided free of charge.

Fifi Peters spoke to Lizo Mnguni from Old Mutual Insure about why reviewing your car insurance policy is necessary: