A steady decline in the frequency of total loss vehicles since 2004 is changing, as total losses increased slightly in 2007, continue to rise in 2008 and are expected to continue that upward trend into 2009, according to research from information provider Audatex.

The rising cost of raw materials, a steady decline in used vehicle wholesale prices, actual cash values in some vehicle segments and an older insured vehicle population on the road are contributing to this trend, which does not bode well for the collision repair industry.

Total Loss % of Claims

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.