How the global chip shortage can impact your auto insurance

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Joey Held

As a writer, Joey Held has specialized in business, marketing, sports, music and insurance topics for more than a decade. He's also a podcaster …

We seldom think about the global supply chain and all the intricate pieces that have to fall perfectly into place to have the products we need every day at our fingertips. That is, until something goes wrong. The COVID-19 pandemic introduced many side effects into our lives, including a number of supply chain issues. 

Those supply chain issues have also affected the auto industry, resulting a global shortage of semiconductor chips. These chips are used to provide cars with technology like electrification, safety features and driving assistance.

Per AlixPartners, the chip shortage resulted in an estimated loss of production of 7.7 million vehicles in 2021, costing the global auto industry $210 billion in revenue. Car manufacturers continue to shut down or cut production of their vehicles. And semiconductors aren’t as simple to make as IKEA furniture — they take 12 to 20 weeks to manufacture. Combine that with additional production and transportation time and a new chip order takes about six months to complete.  

If you weren’t looking for a new car in the past few years, you may not have felt the immediate impact of the chip shortage. But this issue won’t resolve itself anytime soon. While some automakers think we’ll get back to normal later in 2022, chipmakers have less optimistic outlooks, anticipating delays and supply chain challenges through as far out as 2025.

It’s clear the auto industry is feeling the pain of the chip shortage, but will that trickle down to your auto insurance?

Fewer features, higher prices

Buying a new car is an exciting time. You get to take a handful of vehicles for a spin and explore all kinds of features, from hands-free unlocking to safer dashboard screens. However, the chip shortage has forced auto manufacturers to cut back on some of those features. While new cars still have the basics — thankfully, we aren’t seeing things like steering wheels or doors being removed — many manufacturers are cutting elements like touchscreens, HD radios, heated seats and navigation systems.

Even with this lack of features, Edmunds reported used car prices climbed to a record high of $25,410 in the second quarter of 2021, an increase of more than 21% from the previous year. The good news? New car prices seem to be leveling off a bit, though at $40,827, they’re still well above used car rates. Additionally, with fewer vehicles in production, it might be harder to find the exact car you want.

What this means for your insurance

The lack of features may actually lower your monthly premium, though likely not by much. Most car manufacturers are removing luxury features, but are still focused on driver safety. However, it’s worth double-checking what you might be missing out on while car shopping, because it could impact what you pay for your insurance. 

Repairs will cost more and take longer

Some manufacturers have halted production of certain parts. Should you get into an accident and need repairs or replacements (say, for a bumper, timing belt or monitoring system), it might be harder for a mechanic to find the right part to properly fix your car. Because of that scarcity, many repairs are more expensive than usual.

In some cases, an auto shop may tell you to return when the part comes in. But if the repair is significant enough that you need to leave your car over the span of several days, you’re either without a ride or need to get a rental car — which also costs more than usual, since there are fewer vehicles available.

These higher costs make it even more imperative to keep up with your routine maintenance. Things like oil changes and rotating your tires should be taken seriously, and if a check engine light or other alert comes on, get your car into a shop.

If the repairs are due to an accident, report your claim as soon as possible and provide all the documentation your insurer needs. Doing so in a timely manner can help get you back on the road more quickly. 

What this means for your insurance

Insurance companies have raised premiums in many states in the last year, and one of the contributing factors is the increasing cost of claims due to more expensive repairs. 

The threshold to declare a "total loss" is changing

With the shortage of new vehicles, insurance companies may think twice before deeming a car a total loss. Typically, an insurance adjuster looks at the repair costs, and considers a vehicle totaled if the cost to repair is 70% or more than what the vehicle is currently worth. 

“When the cost of a bumper goes from $500 to $800, all of a sudden we're pushing up against that 70% threshold,” says Christopher Cook of Alliance Insurance. “We're going to see more cars deemed a total loss because of repair costs than we would have in the past years.”

But Hayley Crandall of Insurance Navy disagrees. She believes insurance companies may alter that traditional threshold, considering the circumstances.

“There have been recent instances of insurers labeling fewer cars as ‘totaled’ after an accident,” she writes. “Instead, the vehicles are being fixed when, under normal conditions, they would be declared a loss and subsequently scrapped. According to insiders, the math surrounding determination of whether a vehicle is totaled has changed.”

Either way, it’s a good reminder to continue to drive safely. Limit any distractions and try and minimize the amount of times you have to slam on the brakes.  

What this means for your insurance

If you bought a car within the past two years, consider adding coverage around replacement costs. Insurance companies have different names for this type of coverage, but look for something like purchase price guarantee, auto security coverage endorsement or better vehicle replacement. Should you need another car — if yours gets totaled or otherwise becomes undriveable — this coverage will compensate you for any difference in price.

Insurance for non-owners

Let's say the chip shortage and the lack of available cars leaves you completely without a vehicle. 

As long as you have a driver’s license, you still need auto insurance, even if you don’t own a car. You might live in a household where someone else has a car, or you may need to borrow a friend’s ride to run some errands. And you can’t rent or lease a car without auto insurance, either.

Another scenario: you have an older car that finally gives out one day. You live with someone else that owns a car and decide that you don’t want to replace yours right away (or at all). Continuing to pay a monthly premium for a car that’s not functioning seems like a silly decision, so your insurance company should offer insurance for people that don’t own cars — and it could save you hundreds of dollars a year.

What this means for your insurance

As the chip shortage continues, insurance companies may start offering more robust options for non-owners. These might look similar to telematics insurance, which adjusts premiums based on factors like how frequently and when you drive, and how often you do things like slam on the brakes or quickly accelerate. An insurance company might even send you a device or ask you to download an app so it can determine if and when you’re actually behind the wheel.

Wrapping up

The chip shortage will continue to be a prevalent factor in the auto industry for the next few years. Take the proper preparations and maintenance now so you don’t wind up in a tough situation later. And, as always, regularly compare rates and check on potential discounts to ensure you’re maximizing your insurance savings.