Recent inflationary pressures are causing administrators to adjust rates for Vehicle Service Contracts (VSCs). The U.S. Bureau of Labor Statistics reported that inflation for motor vehicle parts was +14.9% year-over-year in June 2022.
Are You Ready to Change Rates?
VSC pricing changes may not be common in your organization. Loss ratios for many administrators have been stable for many years. This stability often stems from the increasing dependability of vehicles that effectively balance moderate inflation. As a result, some VSC rates may have been unchanged for a decade or even longer.
Administrators that have not needed to change rates for many years may lack personnel with experience in implementing rate changes. Thus, understanding the system implications and execution of a rate alteration might be unclear. It is imperative for administrators to comprehensively review the implementation plan for the rate change and identify any organizational gaps. A successful rate adjustment necessitates collaboration between product, marketing, and systems personnel.
Are You Looking at the Correct Data?
Most cession reports are by accounting year and are inception-to-date (ITD), year-to-date (YTD and month(or quarter)-to-date (MTD). Make sure you are looking at the current period (YTD and MTD) reports and the trends in those reports. Current results are much more indicative of the need to change rates than ITD.
Believe Your Data!
Given the high claims frequency and relatively low cost-per-claim of a VSC, data reaches “statistical credibility” even at a relatively low level of claims. If your book is displaying adverse results, it is more likely attributable to underpricing rather than randomness.
What Kind of Risks Do You Have?
The spectrum of vehicles commonly covered has grown to include high-mileage vehicles, electric models, and luxury brands. Be sure and segment your book by all the rating variables and by dealer to make sure you identify the underlying issues.
It is Not All About the Price
Achieving financial objectives is not solely about price adjustments. Other strategies, such as the following can effectively lower indicated reserves with smaller rate increases:
- excluding certain elements of coverage particularly for high-mileage vehicles
- adjusting vehicle classes
- raising deductibles
Have a Plan
Regardless of whether your program is meeting current expectations, having a contingency plan is essential. Increasing reserves is a multifaceted task that influences numerous areas of administration. Given the likely increase in frequency of these changes, having a plan is crucial even if immediate adjustments to your reserves are not needed. The emergence of new vehicle technologies and economic volatility may necessitate rate changes in the near future, and preparedness is always a smart approach.
