About Avanta Ventures
As the venture capital arm of CSAA Insurance Group, we're empowering startups to bring fresh ideas forward.



How the increasing volatility of vehicle values impact insurance

The ability to effectively manage vehicle-valuation volatility is becoming increasingly critical
Published on Oct 9, 2023
EV Charging Vehicle

Vehicle prices and residual values have swung wildly over the past five years, driven by the COVID-19 pandemic and the ensuing supply-chain disruptions. This acceleration in volatility has led to significant challenges for stakeholders across the mobility ecosystem, from Hertz’s recent bankruptcy to substantial increases in claims severity and loss costs for auto insurance companies.

Spurred by the combination of a strong market need, lackluster existing solutions, and structural disruptions within mobility expected to further increase vehicle-value volatility, startups are emerging offering innovative products that enable stakeholders to better manage and protect against this risk.

Increasing volatility

The broader mobility and automotive landscape has and continues to experience significant disruption from a combination of structural and transitory forces. These changes have in turn resulted in increasing volatility within the industry, particularly around vehicle pricing and residual values. Most recently, COVID-19-driven impacts on both consumer demand and the vehicle manufacturing and distribution supply chain saw vehicle pricing swing sharply lower during the initial onset of the pandemic before rebounding to a nearly 40% increase from pre-COVID levels. While the global pandemic represents the single largest recent shock on vehicle values, volatility is expected to remain elevated moving forward driven by a variety of disruptive forces. From Volkswagen’s emissions scandal cratering its vehicle values to the obsolescence uncertainty created by the shift from internal combustion engine (ICE) cars to electric vehicles (EVs), a litany of factors has made it increasingly challenging to predict and manage vehicle values over time.

Forecasting and managing vehicle residual values remain a critical component for multiple stakeholders across the mobility ecosystem, from rental car companies to OEMs to insurers. The inability to do so effectively can lead to negative business and financial impacts, with Hertz’s recent bankruptcy in May 2020 as a prime example. To finance the purchase of its rental vehicles, Hertz and other rental car businesses employ significant amounts of debt, specifically in the form of asset-backed securities, with the vehicles themselves as collateral. This financing arrangement enables Hertz and others to purchase vehicle fleets with minimal equity investment while securing lower interest rates due to the collateralized nature of the loans. The flip side, however, is that vehicle valuation risk must be carefully managed as lenders require vehicle asset values to be marked to market monthly to maintain collateral covenants. Any shortfall from the expected depreciation forecasts would need to be made up by Hertz in the form of cash. This dynamic was the primary cause of Hertz’s bankruptcy when vehicle prices across the board dropped by over 15% in two months during the initial onset of the pandemic.

While Hertz’s bankruptcy highlights one example, the challenge of effectively managing the risk of vehicle values permeates the broader mobility industry. OEMs, which hold leased vehicles on their books, are also facing difficulties in leverage ratio requirements, particularly as lease rates for EVs are nearly double that of traditional ICE vehicles. Auto financing-focused lenders are similarly experiencing these pain points with loan default rates increasing and more vehicles being repossessed and resold. Auto insurance carriers are being hit hard by rising claims costs, driven by a combination of frequency returning to pre-pandemic levels, but more notably by the escalating severity of accidents. Directly contributing to this severity dynamic is the rising repair and replacement costs for vehicles.

Vehicle-value volatility is expected to accelerate and remain elevated as the mobility industry undergoes fundamental disruption, with EVs expected to reach 85% of new vehicle sales in the next 15 years, expensive-to-repair Level 3 advanced driver-assistance system (ADAS) features entering commercial production and Level 4 autonomous vehicle (AV) fleets beginning to expand geographically.

Limited current toolsets

There currently exist limited viable solutions that enable the effective management of vehicle volatility. The most common methodology pursued by fleets and lenders is simply diversifying the vehicle base through purchasing and holding a mix of vehicle makes and models. This strategy, however, is not only inapplicable to stakeholders with concentrated risks, like OEMs, but also only protects against a portion of risk. Specifically, diversification is effective in managing the idiosyncratic risk of price changes in specific vehicle models but does little to protect against broader market-level fluctuations. For example, new commercial battery chemistries that dramatically increase range and charging speeds could lead to falling values for all existing ICE vehicles and EVs regardless of make or model.

The other product some have sought to leverage, with limited success, is residual value insurance. Despite its appearance as a potentially attractive proposition, residual value insurance has seen very limited uptake within the automotive segment due to economic and execution challenges. More specifically, the product itself was designed with a focus on individual asset-level underwriting and claims processing, which has resulted in high premiums that make it economically unfeasible for large fleets such as Hertz or OEMs to hedge against volatility risk. The asset-level underwriting and claims process also creates operational challenges for large fleets, particularly those that see a high turnover volume of vehicles.

New financial products

Most directly addressing this challenge is Exponential Exchange, which has created a marketplace and exchange that enables multiple stakeholders across the mobility ecosystem to more effectively manage and hedge against vehicle-value volatility risk.

The company’s platform consists of a vehicle price index built on a foundational dataset sourced from vehicle auction houses, representing more than 80% of all annual wholesale volumes, and supplemented by proprietary vehicle sales and mark-to-market data from key partners. The result is an index (recently published on Bloomberg – ticker: AUTO) that is highly correlated with market-wide movements in vehicle value. Leveraging this index as a transparent and accurate measure of changes in vehicle values, Exponential Exchange is now creating a futures marketplace that allows parties to create and trade vehicle-value futures contracts.

Looking ahead

As vehicle prices continue to fluctuate widely driven by both frequent temporary disruptions and structural changes to the mobility ecosystem, the ability to effectively manage vehicle-valuation volatility becomes increasingly critical. Strategic partnerships enable the opportunity to deploy novel products to manage such volatility, driving more predictable loss costs and reducing the impact of unexpected volatility on the bottom line and surplus.

Related Posts:

We remain eager to explore new opportunities, partnerships and collaborations with promising start-ups. If you have an idea or proposal that aligns with our mission, we encourage you to reach out to us.

Share This