NEW YORK — The relentless rise in auto insurance rates is putting a strain on car owners and fueling inflation.
Auto insurance rates increased 2.6% in March and 22% from a year ago. The cost of premiums has steadily increased since 2022, even as consumer-level inflation has gradually eased from its peak of 9.1% in the middle of this year. Consumers have experienced some relief as the rate of increase in food and energy costs, two key components of most budgets, has eased significantly.
But the costs of auto insurance and car ownership have become a sticking point for consumers and the Federal Reserve in its fight to return inflation to its 2% target.
Typically, individuals would see a noticeable increase in their premiums due to speeding tickets and other moving violations. The addition of new drivers or a general increase in claims in the area were other reasons.
But the persistent rise in rates over the past two years has been much more drastic. Prices of new vehicles began to climb during the pandemic, mainly due to a global shortage of computer chips amid production cuts and supply chain bottlenecks. Dealers spent much of 2021 with few or no cars in stock.
Car price increases have eased as 2024 approaches, averaging $47,338 in January, down from a peak of $48,516 in late 2022, according to Edmunds.com.
The higher value of cars, coupled with more advanced technology and more complex parts, has increased the overall cost of repairs. Overall maintenance and repair costs jumped 8.2% in March compared to last year, according to the U.S. Bureau of Labor Statistics. This has eased a bit over the last year. The rate of increase reached 14.2% at the start of 2023.
“Severity is really what has influenced rates the most over the last couple of years,” said Greg Smolan, vice president of insurance operations at AAA Northeast. “In the past, a fender-bender didn’t have all the sensors and cameras.”
The overall rise in automobile prices and auto repair costs prompted insurers to begin raising premiums as the overall value of cars increased. Price increases in insurance premiums, like many other increases from food to clothing, have been persistent and are less likely to fall in step with broader inflation, if at all.
This was beneficial for insurers who saw their profits increase. Wall Street expects bigger leaps forward in 2024.
“Our only focus last year was getting the rate right,” Progressive CEO Tricia Griffith said during a fourth-quarter earnings conference call. “We think we’re in a really good position now.”
Progressive’s profits jumped 50% and its revenue jumped nearly 18% to $62.1 billion in 2023. Wall Street expects its profits to skyrocket nearly 80% in 2024 with a 14% increase in revenue.
Allstate reported a modest profit in 2023 after reporting a loss a year earlier. Wall Street expects its profits to increase 13-fold, while revenues will increase 10% to $62.9 billion in 2024.
“Companies are now getting much closer to pricing adequacy,” Smolan said. “I think you’ll see some leveling off of really significant increases.”
The process of obtaining auto insurance can be confusing and overwhelming, given the different mix of requirements in each state, additional options, and confusing industry and legal jargon used by insurers. The first step for many should be to better understand auto insurance, according to the Insurance Information Institute.
Consumers should shop around by getting at least three different quotes and from different types of insurance companies. Additionally, comparing costs before purchasing a car could help consumers get a better idea of the true cost of owning a specific car. Premiums are based in part on the price of a car, as well as potential repair costs and safety data.
Deductibles could be a major factor in determining the cost of monthly premiums. This is the amount a driver is required to pay in the event of a claim. Higher deductibles generally mean lower premiums.
Consolidating multiple policies under one insurer could result in a reduction. This is common for homeowners who use the same company for their home and auto insurance policies. There may also be discounts for insuring more than one vehicle with the same company.
Defensive driving courses also help provide drivers with discounts on insurance. Timing and standards vary by state, but classes are generally offered in person and online. Companies like Progressive and Geico often offer multi-year discounts for taking such a course. They can usually direct policyholders to reputable companies offering the course and certificate.
ABC News
