A Gas Pricing Crisis Has Become
a GAP Pricing (and Reserving) Crisis
CreditRe will present a 1˝-day intensive summit
on September 9-10, 2008 to analyze the effect of recent
dramatic shifts in vehicle sales, vehicle prices, and
depreciation curves on GAP pricing and GAP reserve
levels. Loss severity has risen dramatically. Reserve
increases will likely be needed before December 31,
2008. Immediate and material adjustments in earnings
curves are required for in force GAP waivers on both new
and used vehicles. Summit details can be found below
the following explanation for these dramatic changes.
Attached are the PDF of this email and articles
illustrating the effects we will be discussing.
What Happened?
 A vertical drop in
many vehicles’ selling prices (i.e. “Actual Cash Value”,
“ACV”) has taken place in the last four months and has
resulted in a drop in the amount a primary insurer will
pay on a total loss. The result is an immediate rise in
negative equity among existing loans. Loss severity is
rising, and GAP exposure will continue deeper into the
loan term. These effects will continue for several years
because of 1) trucks and SUVs coming off leases with
actual values much lower than the stated residual value,
and 2) the inability of many people, for a long time, to
purchase another vehicle because of dramatic amounts of
negative equity on their existing vehicles. Loss
frequency will likely increase because “thefts” rise:
people park their vehicles, walk away, and leave the
keys.
The value of
vehicles protected by GAP has depreciated by 5% overall
over the last year, mostly in the last four months;
this is in addition to expected depreciation. The
amount of negative equity in the overall GAP protection
world has increased by at least 5%. Some vehicles have
depreciated more than 20% over the last year in
addition to expected depreciation.
Loss severity on
active GAP waivers and GAP insurance policies will rise
by 10% in the second half of 2008. This changes the GAP
earnings curves and will result in the need for reserve
increases on in force business by as much as 10%
before December 31, 2008. This applies to NEW and
USED vehicles.
For new loans on
NEW vehicles, we are facing dramatically new GAP loss
costs if MSRP remains the definition of “value” in
vehicle lending. Manufacturers and dealers are now
heavily discounting many models and selling them far
below MSRP. Yet, many lenders continue to use old LTV
standards based on MSRP. A vehicle sale that had an LTV
of 120% six months ago could translate into a 160% LTV
today. Lending practices or GAP rates must change
quickly.
Consider the
attached
article on the Dodge dealer selling new Dodge Ram
trucks for 50% of MSRP. With a $30,000 MSRP, an
appealing LTV ratio of 120% means a loan of up to
$36,000. With a transaction price of $15,000 for the
truck, the gap on day one is $21,000. Would someone
finance $36,000? Well, the buyer will likely be trading
in a truck whose value has declined sharply, so there
may be a lot of negative equity to roll over.
For new loans on
USED vehicles, GAP loss costs should remain consistent
with current GAP loss costs, since the purchase price
for new sales has been automatically deflated for the
new reality of vehicle values. If the initial
transaction reflects an accurate retail ACV and usual
LTV ratios, the old earnings curves may be appropriate,
lacking further vertical drops.
When purchasing
NEW or USED vehicles, the cost of any accessory (fancy
tire rims), and any non-refundable after-market product
(fabric protection), that did not alter the ACV at GAP
claim time is a cost that increases the amount of GAP
loss severity. The “new” accessories of providing a gas
card or a new gun (see page 2 of PDF) may affect the
amount financed but will not add to the ACV of the
vehicle.
Summit Details
This intensive
summit convenes at 1:00 p.m. on Tuesday, September 9
with a one-half-day primer. This will be a
start-at-the-beginning basics course on GAP pricing and
the basic drivers of GAP loss costs. Seasoned veterans
may prefer to attend only the second day. This session
is offered so everyone will be up-to-speed for the
second day.
On Wednesday,
September 10, we will conduct a full-day course. While
it will be technical, we will attempt to build
step-by-step, have clear examples, and provide value to
anyone charged with technical analysis or responsible
for bottom-line-profit responsibility. We will review a
comprehensive model to calculate GAP loss costs for a
specific transaction.
That morning’s
focus will be the status of the current loss costs
drivers in terms of loss frequencies, patterns of
attrition, and loss severities. The critical session
will be 11 a.m. – 12:30 p.m. when we present our
findings and opinions about the effect the marketplace
changes have had, and will have, on active GAP waivers
and future GAP sales. After a late lunch (assuming we
have not ruined your appetite), the afternoon will be an
interactive workshop-styled session to get your
insights, comments, and questions. The summit will end
when the last person leaves.
The standard
registration is $2,000 for the first attendee from a
company and $1,500 for any additional attendees from
that company, BUT TAKE $500 OFF EACH RATE FOR EARLY BIRD
REGISTRATIONS PAID FOR BY AUGUST 25.
The event will be
held at the Embassy Suites
- DFW Airport North. The room rate is $184.00 per
night payable by the attendee.
Attendees are responsible
for making their own hotel reservations. Discounted
room rates at the Embassy Suites are only available
until August 22nd. The discounted rate is
$184.00. After August 22nd rooms will be charged
at the published corporate room rate and subject to
availability.
Click here to book your room.
Click here to register.
Presentations at Your Office
Following the
September 9-10 summit, we will be available to conduct
one- or two-day seminars/conferences at your offices.
Preliminary pricing for these presentations is
approximately $7,500 for the one-day presentation (which
includes average travel expenses) and $12,000 for a
two-day presentation. Please consider these educational
opportunities as you prepare your budgets for next year.
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