The demand for used cars has exploded since the start of the pandemic, thanks to a global semiconductor and microchip shortage, which has negatively impacted the availability of new cars. This has also led to soaring prices for second-hand cars, and now insured motorists could be paying the price.
“Today’s rocketing car market may pose a problem for your car insurance coverage in the event you have a major accident, your car is stolen, or your vehicle is damaged. Worse, you could be underinsured, and possibly thousands of rands out of pocket,” said Lizo Mnguni, spokesperson for Old Mutual Insure, adding that the company has noticed a trend of rising second-hand car prices in South Africa, in line with the global phenomenon.
Mnguni said the trend of rising pre-owned vehicle prices is most notable in cars manufactured in the years 2019 and 2020. This is largely due to new car buyers who are not willing to be at the end of long waiting lists for brand new vehicles opting to purchase a 2019 or 2020 model equivalent instead.
“Demand for new vehicles is now being diverted to pre-owned vehicles. Used cars manufactured in 2020 and 2019 have benefitted the most, experiencing an annualised increase in their trade values of about 1.5%,” said Mnguni. “There are also issues with the global car supply chain, where availability of second-hand parts are hard to come by.
“Another trend we are noticing is that car depreciation is a bit lower than what it usually is because the demand is so high.”
What does this mean for your car insurance?
“Your insurance provider will automatically adjust your vehicle premium at your policy’s renewal using your vehicle’s latest price information to determine the new premium,” said Mnguni.
“However, given the rising prices of the second-hand car market, some policyholders must be aware that they may actually experience a larger increase in their premium at renewal stage, rather than a decrease, as their vehicle may actually be worth more than what they initially insured it for, or bought it for, given that there has been minimal car depreciation.”
Why the difference in premium?
“When the insurer calculates your premium, they account for the total loss should you have an accident or experience damage to your vehicle. Fender benders and bumper damage can be costly to repair,” said Mnguni.
“Also, bumper bashings occur far more frequently on our roads than total write-offs. This is why your premium increases at renewal stage even though your car value normally decreases.”
The cost of labour and cost of vehicle parts are increasing, which also reflects in your premium. In other words, with the scarcity of many makes and models of vehicles, your car may be worth more than it was when you took out insurance, which means you could be underinsured.
“The onus is on the policyholder to speak to their insurer to ensure that the sum that the vehicle is insured for is accurate. Failing which, you may be in for nasty surprises like finding out you are underinsured, if you get into an accident.”
Below Mnguni shares his top tips to ensure you are not at risk, or in for unpleasant shocks, when purchasing a second-hand car, and factoring in insurance:
- Policyholders must make sure they are buying their cars from reputable dealers when purchasing used vehicles. Don’t forget to look underneath the hood, so to speak.
- You can insure your car for different values. To understand how your premium will be calculated, know the difference between the insured values referred to as retail, trade, or market. Retail value is the cost of your car should you purchase it from a dealership. Trade value is the price a dealership would pay for your car.
- Market value is the price a potential car buyer would likely privately offer you to buy your vehicle. So, if your car is written off and you’d like to purchase the same car again, then you’d most likely want to be insured on a retail value basis, as this would cover the cost of buying the equivalent of the written-off car.
- There are three types of vehicle insurance cover: Third-party, which is the most basic insurance coverage; third-party, fire and theft; and then, Comprehensive. Comprehensive insurance covers a great many things – some of which you may never have considered as being hazards to your vehicle; Natural Disasters, Falling Objects, Fire, Theft and Civil Disturbances.
- While the issue with second-hand car market isn’t specific to the type of insurance coverage you have,the problem if you don’t have insurance, is that if you drive into fancy car and are found to be liable, you could spend a large portion of your life paying for a car that is not even yours.
“We urge drivers to look at the specifics of their car and engage with their insurance policy. If in doubt whether or not you may be out of pocket at claims stage, speak to your insurance provider or broker before the unfortunate happens,” said Mnguni.