The microchip shortage plaguing the auto supply chain is the result of a perfect storm that was brewing even before the coronavirus pandemic and will remain for the near future, according to a U.S. Department of Commerce study released in January.

Difficulties obtaining production equipment and components, as well as swelling demand for cars, were punctuated by Black Swan events such as factory fires, energy shortages, winter storms and, of course, COVID-19, the study explained. “Significant, persistent mismatch" in supply and demand for microchips; median demand for microchips rising 17% higher in 2021 than in 2019; and median inventory of semiconductor products falling from 40 days in 2019 to less than 5 days in 2021, means “the semiconductor supply chain remains fragile," the report said.

That's bad news for the personal auto insurance market. “A new car off the lot has approximately 1,000 chips in it these days, which is significantly higher than even five or 10 years ago," says Jim Hyatt, executive vice president and chief underwriting officer at Arbella Insurance Group. “An electric vehicle actually has around 2,000 chips in it—so with the demand for all the hybrid and electric vehicles, the demand for chips is extreme."

However, the microchip shortage joins a list of other factors impacting personal auto. “With the demand for car parts and new cars, the supply chain is slowing everything down, impacting not only the time it takes to get things, but the cost of the items," Hyatt says. “Due to the pandemic, people had been less comfortable taking public transportation, and preferred to buy cars to drive themselves. Many people moved out of the city to live in the suburbs, which has also driven up the demand for car sales."

The labor shortage is another big factor. “There are labor shortages in body shops and auto manufacturers, and that just raises costs and increases the time to get cars repaired or to manufacture them," Hyatt adds.

The extra time and money to repair or replace vehicles puts carriers in the hot seat, especially those that consider a smooth claims process as a differentiator. “The loss ratio strain that the auto insurers are feeling right now may mean a slight hit to profit-sharing for independent agents," he says.

“Agents may already be seeing how customers are frustrated with how long it takes a vehicle to be repaired," Hyatt continues. “They need to prepare their customers for the claims process and how it has been impacted by the supply chain."

As the cost to manufacture and repair increasingly chip-dependent cars continues to grow, “one big impact this may have on the industry in the future is that the cost to repair the vehicle is overwhelming the benefit of improved crash avoidance," he says. “All these vehicles are so much safer today because of the lane departure warnings and alarms that help avoid accidents. The expectation has been that eventually safer vehicles would drive down accident rates faster than the cost to repair, so auto rates would potentially come down. But now that's a bit more in question."

Another future trend that agents should keep an eye on is “a number of startup auto insurance companies around the country are based on data-driven pricing models, but many of these companies have outsourced their claim organizations in totality," Hyatt adds. “With these massive increases in chip costs and the supply chain challenges, I think some of these startup auto insurers will really begin to struggle, if they haven't already."

AnneMarie McPherson is IA news editor.