Is your car insured for the right value?

17 March 2023 - 13:26 By Motoring Staff
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Thanks to inflated used car prices, thousands of South African motorists could be underinsured.
Thanks to inflated used car prices, thousands of South African motorists could be underinsured.
Image: bilanol / 123rf

Thanks to inflated used car prices, thousands of South African motorists could be underinsured. This is the warning sounded by industry experts.

According to AutoTrader data, used car prices have risen by 10% in the past year. This is the result of a perfect storm of scenarios, including but not limited to the shortage of semiconductors (which translates into a lower supply of new cars, thus a higher demand for used cars) as well as pent-up demand from lockdown.

This increase is not specific to any brands. There has been a surge in prices throughout the second-hand car market. However, insurance premiums might not necessarily keep pace, placing motorists at risk if their cars are stolen or written off in an accident.

This comes at a time when South Africans need to reduce their spending like never before. According to the World Bank, the economy continues to recover from the effects of the pandemic, and slower than expected.

“Poverty has reached levels not seen for more than a decade while inflation has increased to a 13-year high,” the bank warns.

Accordingly, consumers are tightening their belts. But not when it comes to car insurance, warned George Mienie, AutoTrader CEO.

“Saving money on your car insurance isn’t necessarily sensible. While it’s a good idea to shop around for quotes, it’s important to ensure t you’re not underinsured.”

Vehicle-related crime is rampant and it is increasing. The official crime statistics for July 1 to September 30 2022, revealed by police minister Bheki Cele, paint a grim picture. Theft of motor vehicles and motorcycles rose by 13.9% while carjackings escalated by 23.6% compared to the same period in 2021.

“Insurance isn’t a nice-to-have,” said Mienie.

“In these circumstances, it is essential.”

Do motorists have adequate insurance cover, or are cars being insured for less than their replacement value? 

To answer the questions, we obtained average selling prices on AutoTrader for three popular vehicles: the Toyota Aygo, Suzuki Jimny and Honda Jazz. Then we took a look at typical, and widely accepted, insurance values. The picture that emerges is worrying.

However, we need to explain the values insurers work with. 

According to Wynand van Vuuren, client experience partner at King Price Insurance, insurance companies typically use three values: the retail value, trade value and market value.

“Most insurers base their values on the Auto Dealers’ Guide listing as published by TransUnion) The retail value is the highest of the three. The trade value indicates what you could expect to get paid if you trade in your car. The market value falls between the retail and trade values,” he explained.

According to Mienie, this is different from using live market data to provide values.

“Live market data tells you how cars are trading now or in the recent past. These prices fluctuate depending on market conditions. Our machine learning pricing algorithm sees trends and how they’re trading using live market data. Essentially it puts a prediction on not only where the price has come from but where it is going. For some time this has been accurate to within 3% of prices. For example, if a rental car company sells a fleet, the price of the Polo, which is a popular fleet car, might drop. It’s important to use this information in your car buying and insuring journey too,” he noted.

Let’s look at the actual figures. 

Our first example is the Toyota Aygo 1.0 (five-door), which is listed as trading on AutoTrader for an average price of R131,006, with an average mileage of 80,429km and an average year of registration of 2016. This is what you can expect to pay for a used Aygo today. But how do the insurance values compare? The retail value according to  the Auto Dealers’ Guide is R115,000, the trade value is R98,700 and the market value is R126,500. If that Aygo was stolen, the owner could be challenged to replace the car with a similar vehicle.

“It’s important that you take note of any optional extras that may feature in the car, such as seat warmers or sunroofs, as this may add value and therefore command a higher price to replace. It’s important you take this into consideration. No used car is the same,” said Mienie.

What about the Suzuki Jimny 1.5 GLX? 

It is listed on AutoTrader for an average price of R339,417, with an average mileage of 34,852km and average year of registration of 2019. According to the Auto Dealers’ Guide, the retail value is R306,500, trade is R281,600, and market is R294,050. Again, this motorist would be hard-pressed to replace the car with a similar make and model in a similar condition.

Honda Jazz 1.2 Comfort

It is listed on AutoTrader for an average price of R145,589, with an average mileage of 92,257km and an average year of registration of 2015. And the insurance values? The retail value is R117,200 (as per the Auto Dealers’ Guide). The trade value is R103,700 and the market value is R110,450. A motorist looking to replace this could be in a similar predicament as the Aygo owner. 

What can motorists do about these discrepancies? 

The best advice: include tools in your buying journey that will help you establish the real value of your car and then ensure if it is stolen you can replace it.

“It’s neither sensible nor prudent to go for the lowest insurance premium. Yes, you will be happy with the savings as long as your car is not stolen. But your insurance policy is there to ensure you’re covered if it is stolen. Ideally, you want to replace your stolen car with a similar make or model without it costing you more,” said Mienie.

Van Vuuren stressed it is also crucial that you compare like with like.

“You need to compare prices for comprehensive insurance, which covers accidental and hail damage, theft and hijacking, and your liability towards third parties. Most insurers offer options that only cover liability or only theft. The monthly premiums for these products are lower as they cover a reduced risk, but you won’t be covered for all kinds of damage or loss.”

Van Vuuren said if your car is financed by a financial institution and you owe more than what your car is insured for, you should take out credit shortfall cover. This pays the amount you owe the financer after your insurer has settled your claim. 

Mienie pointed out that this scenario of price discrepancies won’t be the case in 2023 if demand for used cars falls.

“If the new supply chain issues as well as chip shortages for new cars are sorted out this could cause increased demand for new cars and put downward pressure on used car prices as demand falls. The used vehicle price inflation bubble is flexing and, under the right economic demand and supply conditions, could burst in the next 12 months,” he said.

Our parting advice: regularly check the live value of your car against its insured amount.

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