Detroit's woes to inflate car insurance rates

The fading value of the Chrysler and GM brands will force insurers into larger payouts for parts and repairs. Drivers of those models will ultimately foot the bill.

By Insure.com

Drivers of many American-made vehicles may soon find themselves handed bigger car insurance bills due to the automakers' troubles.

While Chrysler works its way through bankruptcy, General Motors tries to hammer out turnaround plans and Ford nurses its supplier network, wheels are in motion for events that will impact insurance.

Car insurance rate increases spring from a variety of factors, including higher costs for labor and repair parts. When the components used in an accident repair rise in price, insurance companies are forced to make larger claims payouts, and later adjust rates when data show that premiums are not sufficient for increased claims.

Automaker troubles are on track to affect those bottom lines. Here's how it could happen.
Resale values drop
A decline in resale value (also called residual value) for certain models, especially discontinued makes like Pontiac, will lead to more expensive insurance claims.

Consider this: After an accident, a car is considered a "total loss" when the cost of repairs exceeds a certain percentage of the car's value. That threshold is often 70%. At that point, the insurance company gives its policyholder a check for the car's market value and the car is hauled to the salvage yard. Total losses are among the most expensive claims for auto insurers.

With the uncertain future of GM and Chrysler, their used vehicles will likely drop in value as they become less desirable to used-car shoppers. This could hit used Pontiacs especially hard, as buyers perceive that parts and service will be hard to come by, or simply don't want to own a discontinued brand.

A decline in market value means the threshold for "total loss" will be reached more quickly and on more cars. Suddenly, auto insurers could find themselves swamped with total losses on Pontiacs and other American cars.

Once insurers see data showing a spike in total-loss payments, they'll increase rates for the drivers of affected vehicles.

Susanna Gotsch, industry analyst at CCC Information Services, which tracks auto claims data, points to the demise of Daewoo as a possible window into the future. Daewoo discontinued production in 2000.

"What we saw was that for Daewoo vehicles, the percentage of repair appraisals that were flagged total losses increased exponentially," Gotsch says.

CCC data show that from 2001 to 2008, the percentage of model year 2000 Daewoo four-door sedans deemed total losses increased from around 6% to roughly 42%. By comparison, the industry average of total losses went from about 4% to 20%. That means twice as many Daewoos were junked as the average.

"If, at the end of the day, GM is not a viable company, then it's like a Daewoo," says Gotsch.

Or consider the fates of Oldsmobile and Plymouth. CCC notes that one year after those brands were discontinued, a 2-year-old Oldsmobile or Plymouth had the resale value of a typical 5-year-old vehicle.

With those rock-bottom resale values, a spike in total losses won't be far behind.

The fading value of the Chrysler and GM brands will force insurers into larger payouts for parts and repairs. Drivers of those models will ultimately foot the bill.