While auto finance execs continued to squash fears of a forming subprime bubble at the industry’s annual get-together in January, executives on the “I” side of the F&I equation say the performance of a core product tells a different story. Their advice to dealers is to start preparing for what they believe will be a severe slowdown in the next 24 months.
The product raising those alarms is GAP, which is designed to protect consumers by paying the difference between the value of a vehicle at the time it’s totaled (or stolen and not recovered) and the balance owed on the loan. For dealers, the product puts customers who suffered a total loss of their vehicle back in the market for a new car.
There’s just one problem: The frequency and severity of GAP claims — two key measures of the product’s health — are now reaching concerning levels.
“The rate that the frequency is deteriorating, from my perspective, is something that we haven’t seen before. I mean, these trends are getting bad,” says Joseph Kirsits, senior vice president of actuarial consulting firm GPW and Associates Inc. “But I’ve talked to other people in the industry who say they’re not seeing anything too alarming, so that’s the difficulty.”
Top of Mind
While the rest of the industry was focused on new digital retailing solutions being rolled out at the 2017 National Automobile Dealers Association (NADA) Convention & Expo in New Orleans, most discussions in the F&I arena centered on the GAP situation. Executives say the alarms really started to go off last fall. The first rang during a Guaranteed Asset Protection Alliance (GAPA) event in October; the second at GPW and Associates’ F&I Reinsurance and Product Conference in November.
The consensus is that dealers should expect to see rate increases if their GAP providers haven’t done so already. The fear is that providers who have held off on raising rates to maintain production aren’t properly reserved for further deterioration. Executives offered several reasons for the product’s issues — some of which could cause problems for other core products like vehicle service contracts.
“There was no better time to write GAP than 2008 and 2009. That was a great time,” says Scott Karchunas, president of Protective Asset Protection. “The lenders became more conservative and were less willing to fund loans at a 150% loan-to-value ratio. Now we’re on the other side, with longer loan terms and lenders are back to lending more aggressively again at 140% to 150%.
“So all these factors that were positive indicators for the GAP business are now turning negative. And you don’t add them together, you multiply them together,” he adds. “So claim frequency and severity accelerate quickly, and that’s what’s happening in this environment.”
Dave Borders, president of Allstate Dealer Services, says the F&I product provider has taken some rate increases and suffered “a little bit” in terms of production. But he notes that dealers who reinsure the product with the company appreciate the higher reserves. “It keeps them secure from having any undue pressure on their results,” he says.
“It’s being addressed, and we’re comfortable with where we are on that,” he adds, attributing the situation to a combination of soft lending and consumers simply driving more. “As a primary auto insurance provider, we’ve got excellent data that we’re able to bring into the dealer services program.”
And what his data shows is that insurance companies are totaling more cars because expensive components like vehicle sensors are increasing the cost to repair. At the same time, loan-to-value ratios are rising, more credit is being extended, interest rates are increasing, and loan terms are stretching.