What's it worth to you?

It’s like a fashion show for petrolheads. One by one, shiny cars are driven from an outdoor car park and up a small stretch of pavement before entering a covered showroom. There, they will be judged on shape, style and body condition.

But this isn’t London or Paris. The air is filled with exhaust fumes and these models – formerly leased, traded or written off – are past their prime. Still, British Car Auctions (BCA) in Bedford is a great place to find a bargain – and an even better place for insurers to value total loss vehicles.

Insurers consider a vehicle a total loss if repair bills, car rental and paying what it has lost in value add up to more than it would cost to buy a replacement. The payout is based on what it was worth before the accident.

This sounds simple but can be tricky because of the number of valuation sources such as dealer surveys, value guide books, online pricing sites and private sales.

“A lot of insurers go by Glass’s Guide [a value book],” says David Stubbs, chief executive of ETWB, a company that provides total loss valuations to insurers including Allianz. “But the guide is based on what happened in the past and what might happen in the future – it’s trying to smooth out markets rather than reflect them.

“We believe the only fair market value is what a vehicle would cost today, so we come [to BCA].”

Stubbs’s job is to make sure that any vehicle declared as a total loss by an insurer is evaluated accurately. He relies on auctions, salvage yards, private sales and any other resource to help determine what a specific vehicle was worth before an accident.

On this chilly day, more than 300 vehicles – including a 1998 Nissan Micra, 2000 Saab-Scania and 2003 Vauxhall Corsa – are going on the block before a crowd of about 150 men and a handful of women. The bidders include credit hire, leasing and rental companies, with fleet operators and private buyers. Most gather around the entrance so they can inspect the cars as they come in.

The cars – often with high mileage, dents, rust and other imperfections – are largely sold for less than £2,000. This is, of course, the condition of most used vehicles although Stubbs says many policyholders see their car through rose-tinted glasses when they make a claim.

Stubbs, a car lover, easily spots nicks and scratches that might push down a hammer price. The only one that surprises him is for a 1999 Vauxhall Tigra. The driver’s door is rusty, suggesting the owner regularly scraped it against a curb. The tyre pressure is also low – easy to fix, but could suggest the driver was a bit careless.

But the car is sold for £1,125 – £125 more than the Glass price, which is unusual.

The winning bidder might be a rookie private buyer, says Stubbs. Or there might be a limited number of Tigras around.

According to an ETWB audit of total loss valuations made by five leading insurers, the sums varied from 87% to 105% of Glass’s Guide prices. Stubbs says ETWB regularly achieves claim settlements of 61% to 78% of Glass price.

He adds that for a book of 16,000 total losses a year, each percentage point off the Glass price typically delivers a £480,000 reduction in indemnity cost.

When a policyholder has an accident, insurers must decide at what point they will consider the car a total loss. The minimum consideration for total loss would be when the total repair cost is more than 51% of the vehicle’s cash value. But this can rise to about 80%.

Stubbs says insurers should be aiming for a trigger point of about 60%. “One insurer was still using 80% of pre-accident value before calling total loss, but car prices are depressed and variable right now.

“Sales of new cars are down and there’s an attempt to shift and sell. But the used car market is also depressed because no one can afford to trade up. And it’s tougher to get finance.”

Back at his office in Milton Keynes, Stubbs demonstrates this point. He opens a case file of a Chrysler 300C 6.1 V8 SRT-8. The policyholder bought the car new for £40,000 18 months ago. But Stubbs says it is now worth no more than £15,999 because it guzzles petrol. Last year, he says, it would have been worth £25,000 to £30,000.

“There’s no way that conversation’s going to go well,” he says. “But we don’t negotiate; we just try and explain so they understand our reasoning.”

Insurers can send ETWB their claims details. The company then researches and decides the vehicle’s pre-accident value. It then phones the policyholder to discuss their decision and close the settlement. The settled claim details go back to the insurer, which issues the cheque to the policyholder and/or finance company.

Some total loss vehicles still have outstanding loans. An insurer will pay the finance company what it is owed first, and then the policyholder. If the total payout goes to the loan company and the policyholder still owes money, he or she becomes more likely to default. For this reason, a senior valuation source tells Insurance Times, some lower-end car finance companies purposely delay claims settlements. This way, they still get a few payments from the policyholder, and then their payout from the insurer.

Meanwhile, the credit crunch is even affecting repairs. Research from Gocompare.com released last week has found that nearly 30% of motorists are delaying repairs to save money.

Seventeen per cent say they have put off replacing worn-out tyres and nearly 6% have not fixed brake problems. If these percentages hold true across the country, more than 6 million may have defective brakes or worn-out tyres – which could have a big impact on motor claims.

It’s not an easy time to be a motor insurer. But getting the right valuations for total losses could lead to big savings. That doesn’t necessarily mean outsourcing or spending your days at a Bedford showroom. But as car prices fall and credit hire costs rise, it is worth considering the options.