The speed of the recent downturn took many by surprise, with unsold vehicles quickly stacking up in ports and car parks
We’ve all driven past new car lots holding row after row of gleaming new vehicles waiting to be distributed to showrooms, dealerships or transported to overseas markets.
But in a recession, stocks of new cars can prove more difficult to shift.
Stored vehicles kept in open air lots are exposed to extreme weather events, such as flood and hail storms, and dealers need to ensure such risks are properly managed.
Full to bursting
To ensure they will not be burdened with stockpiles of unsold cars, car manufacturers responded to last year’s drop in sales by cutting production levels.
By Christmas 2008 in the UK, production levels had dropped by almost 50%. Some even closed plants temporarily in an effort to preserve business.
However, the speed of the recent downturn took many by surprise, with unsold vehicles quickly stacking up in ports and car parks.
“The holding bays can generally be quite full,” Matthew Maxwell, leading class underwriter for auto at Lloyd’s insurer Amlin says. “You’ve only got to go to South Wales to see that, they’ve got big docksides full of them at the moment.”
And it’s not just the usual storage bays that are full to the brim. Test tracks, construction sites and even multi-storey car parks have become temporary dumping grounds for growing numbers of unsold cars.
Car manufacturers have been hit hard by the financial crisis. Closures, redundancies and shutdowns have consistently made headlines in the US, Europe and elsewhere since the downturn escalated in autumn 2008. And they look set to continue, with General Motors filing for bankruptcy on 1 June.
In the UK it is hoped the government’s ‘scrappage scheme’—where buyers are given a £2,000 discount on a new car if they scrap one that is over ten years old—will boost car sales. It is modelled on a similar scheme that has already enjoyed some success in Germany.
Flood and hail
Of course even in a bullish economy few new cars are bought straight off the assembly line. Most need to be stored somewhere, creating high concentrations of values. “You can see lots with £30m to £50m worth of vehicles sitting on them,” Maxwell says. “The highest we’ve seen is probably £150m.”
The largest open car lots can accommodate as many as 30,000 vehicles, or even 60,000 in a few cases.
The world’s largest compounds, with particularly high value concentrations of value, are in Japan, ports on the west coast of the US—including Los Angeles and San Francisco—the US east coast—including Port Jersey in Newark and Baltimore—and in European seaports, such as in the Netherlands, Belgium, the UK and Germany.
Accumulation also occurs at large production facilities belonging to car manufacturers.
Cars kept in storage are covered for damage through dealers’ open lot insurance. While fraud and theft can sometimes cause losses, the majority of storage depots have tight security.
The biggest risks are weather related. “You’ll have hail storms, you’ll have flood exposures, you could have earthquake if it’s dockside,” says Maxwell, who underwrites risks for commercial vehicles in large open lots around the world.
“Wind isn’t a problem—other than flying debris—and that doesn’t affect the bulk of the vehicles because they are quite tightly packed together.”
Auto dealers and manufacturers can reduce their exposures by undertaking site investigation before opening a new lot.
Avoiding sites near rivers and streams can help prevent potential flooding, while lots in hail-prone areas can be covered with hail nets.
Flooding can also be caused by storm surge, a hazard for many dockside car lots.
“There were a lot of flooded lots in New Orleans after Hurricane Katrina,” Maxwell says. “Obviously people did have contingency plans, but you just can’t move that volume of vehicles quickly.”
More recent losses involved a hail storm in Saudi Arabia, a region not normally associated with natural perils.
Hail damage can cost anything from $2,000 to $10,000 per vehicle depending on the severity of the event.
Car dealers can also help spread the risk by storing vehicles in different locations. This reduces the chance of all its stock being affected by a single event.