Relationship of ACV to Depreciation and what does the term Blue Book Value mean?

Author - Webner
14.09.2022
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Introduction

Actual cash value (ACV) is the fair market value that an insurance company would typically pay after determining its replacement cost and subtracting factors such as depreciation and wear and tear of the vehicle. In financial terms, ACV is the amount equal to the replacement cost minus depreciation of a damaged or stolen property at the time of the loss.
ACV = Replacement cash value(RCV) – Depreciation

How does Actual Cash Value Work?

ACV for which the property could be sold is always less than what it would cost to replace it. The actual cash value is calculated by determining how much it would cost to replace a certain object and subtracting depreciation.

Insurance companies assign a lifespan to an object and determine the ratio of its lifetime left to figure depreciation. When this ratio is multiplied by the replacement cost, the result is an item’s actual cash value.

For example, suppose you have a Motorcycle, that is 5 years old, and it’s stolen during a break-in or damaged during an accident. In that case, the actual cash value portion of your policy means you’ll receive a check for the current market price of the older Bike– as opposed to what it would cost to replace the motorbike with a brand new version.

Replacement cost(RCV):- The term “replacement cost” is often defined or explained by the insurer in the insurance policy. Simply stated, RCV is the expense to replace the damaged object, on the same premises with another object of comparable material and quality used for the same purpose. This works unless the limit of insurance or the cost actually spent to repair or replace the damaged property is less than the actual cash value of the object at that time. An insured should refer to his/her policy for the exact definition and explanation of replacement cost.

Depreciation:- Depreciation in terms of auto insurance is defined as the reduction in the price of the vehicle with time due to age, and wear and tear. As each part of the automobile wears out with time, the value of the vehicle also diminishes. The depreciation cost is generally calculated by evaluating an item’s Replacement Cost Value (RCV) and its life expectancy.

What is the Blue Book or the Kelley Blue Book?

The Blue Book, also known as Kelley Blue Book is a resource that compiles and quotes prices for new and used vehicles regarding financing, repairs, and reviews. The blue book was firstly published in 1926 by Los Angeles car dealer Les Kelley. But its consumer and the online edition came into the role in 1990. Since then it served as a standard within the auto industry in the United States. Not limited to cars, the blue book is one of the most trusted sources of snowmobiles, motorcycles, and personal watercraft information in the U.S.

The Kelley Blue Book provides a fair market value of a car by estimating the range of prices car buyers will pay for a specific car based on make, model, type, and year.

Understanding the Blue Book Value
The Kelley Blue Book(KBB) has become the leading vehicle pricing guide in North America. Car dealers and car buyers confer the Blue Book to decide the resale value of used vehicles. Auto insurers(insurance companies) often use Blue Books as a standard to assess the market value of a car involved in an accident to determine if the car is worth repairing or if it should be written off as a total loss.
The Blue Book examines private party value, recommended retail value, and certified pre-owned value (CPO) for used automobiles. The New Car Blue Book Value shows how much consumers are currently paying for new cars of that type. In the United States, approximately 20 million unique users per month log on to the Kelley Blue Book website.

Example to clarify the working procedure of the Kelley Blue Book Value
Suppose Ashley is thinking of selling her 2017 Toyota Highlander for a newer model. She wants to make sure the dealership won’t lower the price of her car. So she looks up the Blue Book value of her car on the Kelley Blue Book(KBB) website. The KBB tells her that $15,900 is a fair trade-in value for her car as per its condition. So, now Ashley can negotiate with the dealers on the behalf of Blue Book Value and can get the best price for her car.

Webner Solutions is a Software Development company focused on developing Insurance Agency Management Systems, Learning Management Systems and Salesforce apps. Contact us at dev@webners.com for your Insurance, eLearning and Salesforce applications.

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