Insurers should brace themselves for dramatic increases in total loss expenditure if new car prices plunge in the wake of an official government inquiry.
The warning from vehicle repair consultancy Norton Consulting and follows the Competition Commission's recommendation that prices on some new models should be slashed by at least £1,000.
But while showroom prices are set to fall, damage repair costs could remain static.
Norton predicts this will lead to more cars being written-off as total loss expenditure, which typically accounts for between 20-30% of all leading insurers' expenditure, increases.
This is because while cars may become cheaper, the cost of repairs does not. Repairer's labour rates, parts costs and overheads are not going to mirror the drop in car prices.
Eddie Longworth, managing director of Norton Consulting, says: "If or rather when, new car price reductions hit home, insurers' total loss, costs are going to go up pretty soon afterwards."
There will be another knock-on effect for insurers whose customers own older cars, since their value is also set to fall. A second-hand vehicle currently worth £6,000 could drop to around £4,000 when lower car prices kick in.
Norton suggests that this price drop means second-hand vehicles stand a greater chance of being written-off following a serious accident.
To reflect these industry concerns, Norton Consulting has lined up a team of experts to provide advice on how to minimise the effects of the fallout from the Competition Commission report.
Norton, however, said cost control measures can help offset some of these increases, resulting in savings of at least 10%.
Longworth says: "We believe savings of 10% are achievable quite easily and would go some way to offsetting the sort of total loss increases we are predicting."
