Why are auto insurance premiums so high? Blame inflation and a few other factors

Wednesday’s inflation report showed that consumer price growth continues to rise.

The Bureau of Labor Statistics reported that price growth accelerated to 3.5% in March, up from 3.2% in February.

Few categories saw as big a year-over-year increase as auto insurance, which soared 22% from March 2023, the largest year-over-year increase in this category since 1976.

And over the past few years, average car insurance rates have jumped 43%.

As of April, the national average cost of car insurance was $2,314 per year for full coverage and $644 per year for the bare minimum, according to Bankrate.

This works out to about $193 per month for full coverage and $54 for minimum coverage.

A multitude of factors determine how much insurance companies charge drivers, but the cost of almost all of them appears to be increasing.

One of the biggest factors is simply the rising cost of modern vehicles themselves. Today, a new vehicle costs about $10,000 more than before the pandemic. Blame it on supply chain issues that drove up the cost of auto parts, rising labor costs, and customer demand, which naturally drove up prices .

The increasing sophistication of technology in today’s vehicles also contributes to rising costs, said Robert Passmore, vice president of the personal lines division at the American Property Casualty Insurance Association. Cameras and sensors, used for various driver assistance technologies, such as emergency braking, automated parking and blind-spot monitoring, require more expensive parts to replace. They are also subject to higher labor costs, Passmore said.

More complex and expensive repairs also take longer, which translates into higher vehicle costs, Passmore said. And the labor shortage has led to higher salaries for technicians.

At the same time, the higher cost of purchasing a vehicle has encouraged some drivers to keep their existing car for longer. As a vehicle ages, the risk of breakdown increases, increasing demand for repair services, said Sarah House, managing director and senior economist at Wells Fargo.

“Insurers are trying to recover very expensive claims,” House said.

Other factors also come into play. According to the Insurance Information Institute, which represents insurance companies and the insurance industry, the severity of claims, including medical and legal costs arising from claims-related litigation, is also increasing.

In the years immediately following the start of the Covid-19 pandemic, insurance companies suffered significant losses, partly due to an increase in poor driver behavior. As a result, they pushed state regulators, who determine how high rates can go, to allow them to charge higher premiums while threatening, in some cases, to leave the states altogether if they didn’t do so. . According to S&P Global Market Intelligence, these companies were able to obtain huge rate increases as a result.

The bad news is that there is no end in sight to cost pressures.

Insurance companies have requested rate increases throughout late 2023 and early this year, Bankrate analyst Shannon Martin said in an email. Since such rate changes only affect auto insurance policies at renewal time, U.S. drivers are just starting to feel the impact, Martin said.

“Auto insurance inflation is persistent, and although inflation has slowed and supply chain issues are improving, the premium increases we are seeing and will continue to see in 2024 are based on the losses incurred by carriers over the past few years,” Martin said.

“The ultimate goal is to stabilize insurance industry rates, but that may not happen until next year.”