The automotive industry has been hit hard by the current shortage of semiconductor chips. Modern vehicles rely heavily on chips to drive their complex operating, navigation and entertainment systems. But the impact of the crisis extends beyond car manufacturing – it also affects the world of car insurance.
Several factors can be attributed to the international chip shortage, starting with the COVID-19 pandemic. Supply chain disruptions can be attributed to shutdowns and isolations that began in March 2020. Automakers predicted demand for vehicles would drop in the following months, reducing their need for parts. But when demand picked up, the industry was unprepared. Ordering parts quickly became an obstacle.
Manufacturing semiconductor chips is a tedious and time-consuming process. It takes an average of 12 weeks to produce a typical chip, while more advanced versions can take upwards of 20 weeks. In total, it can take around six months to supply equipment manufacturers with semiconductor chips. And starting a new manufacturing plant takes years and billions of dollars. As a result, chipmakers won’t be generating new sources of supply anytime soon.
The automotive chip shortage is also expected to leave its mark on the auto insurance world. With consumers unable to acquire cars and parts, full-coverage insurance policies will be almost non-existent. (Auto insurance policies for non-owners may skyrocket in popularity, but more on that below.)
In response to the shortage of microchips, some automakers have omitted certain features from their vehicles. When insurance companies decide annual premiums, they look at the make, model, and year of the car, as well as any special features it has. If driver assistance features are missing, owners may be offered a lower insurance premium. Or they can choose to reduce coverage limits for things like collision, if the vehicle contains fewer expensive features to lose in the event of an accident.
As demand for cars increases and production stagnates, dealers raise their prices. Vehicles are being sold closer to the manufacturer’s suggested retail price, with discounts becoming rare. Owners of more expensive vehicles tend to pay higher insurance premiums for better coverage. This puts the car insurance industry in an interesting position: although vehicles may have less capable assistance features, the prices at which they are sold could be higher than before the pandemic.
There is also potential for more auto insurance policies for non-owners, for people who have a valid driver’s license but do not own a vehicle or live in a household with one. Car insurance for non-owners can be a smart option in case they find themselves driving a friend’s car.
Even for those who do not own a working car, insurance is often necessary. Non-owner auto insurance policies provide affordable and reasonable coverage for these types of drivers. An increase in demand could occur and the insurance industry must prepare for it.
As the prices of new and used cars rise, consumers are choosing to repair their older vehicles to keep them running longer. Additionally, there have been recent cases of insurers labeling fewer cars as “totalled” after an accident. Instead, vehicles are repaired when under normal conditions they would be declared lost and then scrapped. According to insiders, the calculations surrounding determining the total number of a vehicle have changed.
The chip shortage isn’t going away any time soon. Estimates predict this will last another year or two, with auto production not expected to return to pre-pandemic levels until 2023. So consumers hoping to buy new cars will need to be patient. Many are likely to service or repair their current vehicles instead of opting for newer models, and insurers will have to adjust their offers accordingly.
Hayley Crandall is an insurance analyst at Marine Insurance.