Why car insurance costs are skyrocketing, leading to higher inflation

DETROIT – Skyrocketing auto insurance costs have contributed to inflation accelerating at a faster pace than expected in March and are adding to ever-higher costs for U.S. vehicle owners.

On a monthly basis, auto insurance prices under the Consumer Price Index increased by 2.6%, a year-over-year increase to 22.2%, according to data released Wednesday. The CPI is a key indicator of inflation and is a general measure of the costs of goods and services across the economy.

Auto insurance costs have been on the rise for some time, increasing every month in the CPI since December 2021. Since then, costs have increased 45.8%, according to the state Bureau of Labor Statistics -United. However, auto insurance remains a small part of the CPI, with a weighting of 2.85%.

This increase comes on top of historically high prices for new and used vehicles since the coronavirus pandemic. It is also becoming increasingly expensive to repair vehicles due to shortages in the supply chain, wage increases for mechanics, and additional technology in vehicles, such as microprocessors, cameras, and other sensors. — All of this contributes to increasing vehicle and insurance costs.

“There’s not just one factor, but I think the biggest factor is a combination of newer and more expensive cars, so if you total your car, the replacement cost is really high and a fender bender is very expensive right now,” said Sean Tucker, editor-in-chief of vehicle valuation and automotive research company Kelley Blue Book. “Technology in cars is a very specific problem.”

Instead of having to replace a plastic or steel bumper on many vehicles, a simple fender clip can now damage cameras, proximity sensors, and various other technologies used for new safety devices and tools such as cruise control, parking and emergency braking.

“Premiums have gone up because the cost of auto insurance has gone up,” David Sampson, CEO and president of the American Property Casualty Insurance Association, told CNBC. “There’s a long lag between when trends emerge and when companies see those loss trends exist. It then takes time for them to incorporate that into their pricing requests.”

Earlier this year, Sampson himself suffered minor damage to the bumper of a 2024 pickup truck on his property that he said would have cost him $1,800 to repair or replace.

“All the technology we rely on makes it really, really expensive to replace or repair these vehicles,” said Sampson, whose organization is the nation’s leading trade association for home, auto and business insurers.

The inflation-related increases in insurance costs come more than two years after the Biden administration widely blamed used car prices for pushing inflation higher in January 2022.

Mitchell, an automotive software provider specializing in the collision repair and auto insurance industries, said repair costs were increasing at an annual rate of about 3.5% to 5% before the coronavirus pandemic. . In 2022, increases were 10% or more, with the average repairable estimate for a vehicle at $4,721 in 2023.

Consumers and businesses are not happy with these increases. JD Power reported in June that auto insurers lost an average of 12 cents on every premium dollar collected in 2022 – the worst performance in more than 20 years – leading them to raise rates at the expense of customer satisfaction. .

“What I always remind people is that insurance is based on actuarial science, so it’s not a matter of insurers simply deciding to raise premiums,” Sampson said. “Filings must be based on actuarial loss trends in their rating applications in each state.”

The cost of car insurance — which is required in almost all states – varies by provider, driver, coverage and location. Almost all states have minimum liability coverage requirements, but there are a number of other coverages that may or may not be required in a specific state, depending on insurance provider Progressive.

The list of optional and mandatory coverage areas can be quite long and costly for drivers, which has led many insurance companies to offer usage-based insurance programs that base the cost of a policy on driver behavior using telematics data.

New customers to an insurer have a UBI participation rate of 26%, according to JD Power’s June U.S. Auto Insurance Study.

The study, in its 24^th year, found that UBI usage more than doubled between 2016 and 2023, with 17% of auto insurance customers participating in such programs. Price satisfaction among customers participating in these programs is on average 59 points higher than among nonparticipants, according to JD Power.

Insurance companies say the use of such programs is only expected to increase as costs rise and insurers offer discounts or special prices for safer drivers.

According to the JD Power survey, UBI programs from Geico, Progressive, State Farm and Liberty Mutual were rated above average by customers. USAA, which serves all branches of the military and their families, ranks first.

The JD Power study also found that cost increases have led to customer satisfaction with auto insurance companies being at its lowest level in more than 20 years.

“Overall customer satisfaction with auto insurers has fallen this year as insurers and drivers face the realities of the economy,” said Mark Garrett, director of insurance intelligence at JD Power, in a June press release.

—CNBC Robert Ferris And Jeff Cox contributed to this article.