Frequency of total losses on the rise

"These price increases will likely impact replacement part prices," says Anderson.

The price of hot rolled carbon steel, a major component in vehicles, has nearly doubled to $1,035 per ton. Aluminum, used in many newer vehicles, has increased 22 percent to $2,270 per ton. The price of platinum, which is used in catalytic converters, has increased 70 percent to $2,073 per ounce.

Some experts blame these increases on global demand for raw materials from countries such as China and India, along with inflation and a weak U.S. dollar. Many raw material suppliers are passing these increases on to automobile manufacturers, who are raising new car prices. For example, in June Chrysler announced that it will raise prices by 2 percent to its dealers, and GM recently announced a 3.5 percent price increase for 2009 models.

The increase is attributable to rising commodity prices, including steel, according to Chrysler. The added costs of raw materials to automakers and part suppliers will likely make their way to part price increases for replacement parts used by repairers, according to Brian Grainger, director of product management for Audatex.

"The net result will be increased repair costs, which is likely to reduce the number of vehicles that ultimately get repaired instead of totaled," Grainger says. "As the gap between repair costs and actual cash value of the vehicle narrows, total losses are likely to increase."

While increasing costs of raw materials also drive up new car prices, that doesn't necessarily affect the average repair or total loss decision made by the insurance company.

"The actual cash value is generally governed by supply and demand of the vehicle, not necessarily by how much that 2009 model costs," Anderson says. "Under most insurance policies, the replacement cost of a new model year vehicle is not a consideration in the decision to repair or total loss a vehicle. It is more a supply and demand issue."

Used vehicle wholesale prices

Wholesale prices, as reported by Mannheim's Used Vehicle Value Index, have declined by more than 7 percent during the last six months and 5.6 percent the past year. ADESA's Average Wholesale Used Vehicle Prices Index reflects a decline of 2.4 percent during the first four months of 2008 compared to the first four months of 2007.

Leading this decrease is the decline in demand and value of full-size pickup trucks and large sport utility vehicles, according to Audatex. Traditionally, wholesale prices tend to be a leading indicator of retail used vehicle prices, and these retail prices are used in establishing actual cash values.

"There are people who are upside down on their vehicle loans — they owe more than the car is worth — as large SUV prices have dropped," Grainger says. "That does not impact the repair vs. total loss decision made by the insurance company. The insurance company only pays based on the value of the vehicle, not the loan amount."

But as used vehicle prices drop, they bring the value of cars closer to their total loss value. As that chasm narrows, cars that previously may have been repaired are more likely to be considered a total loss.

Older insured vehicles on the road

According to Federal Reserve data, the weighted average maturity of new car loans by auto finance companies in 2008 is averaging 62.8 months. In 2000, the average maturity of new car loans was 55.2 months. The loan-to-value ratio is now averaging 94.8 percent, compared to 91.5 percent in 2000. This translates to an additional 7.6 months of first-party coverage, required by lien holders. In addition, R.L. Polk recently reported that the current median age of vehicles on the road of 9.2 years is at its highest point since 2001.

According to Audatex data for the first half of 2008, the average model year involved in an accident is 5.9 model years old, versus 5.6 model years during the same period last year. This suggests a 6.0 percent increase in the age of vehicles on the road in the last year. The average model year for a totaled vehicle is 1999.

"The loan-to-value ratio shows that more people are financing more with less vehicle equity. That by itself does not impact the actual cash value," Anderson says. "But the maturity ratio does affect it. When the loan-to-value ratio and maturity ratio are both high, fewer people can sell their vehicles because they are likely to owe more than the value."

For example, when people owe more on their loans than the car is worth, they will keep those cars longer because they can't afford to do anything else. That impacts the percentage of new vehicles on the road.

Extended loan maturities requiring first-party coverage on aging vehicles may lead to more insurance versus owner paid claims than in past years on highly depreciated vehicles.

"Once a vehicle is paid off, some people drop comprehensive and collision coverages," Anderson says. "At the end of the loan term, they can drop all but liability coverage. If they do that and their car is in an accident, the owner covers that loss instead of the insurer."

When a vehicle has a longer loan maturity, insurers have a responsibility to the lien holder and the vehicle owner has the responsibility to keep first-party coverage, Anderson said.

"We don't know to what extent that occurs, but it impacts the number of insurance paid total loss vehicles," he says.