A tree branch rests on a car after tropical storm Hilary moved through Sun Valley, Calif., on Aug. 21, 2023. The cost of private auto insurance and vehicle repairs have increased significantly over the past year. |
The ongoing surge in personal auto insurance premiums in the US shows no signs of abating as consumers grapple with the high cost of what is for many a must-have product.
Between February 2023 and February 2024, the average cost of motor vehicle insurance rose 20.6% to $806.44, according to the latest Consumer Price Index Report from the Bureau of Labor Statistics. It was the steepest year-over-year increase for that metric since the mid-1970s.
The higher rates people are paying is a "toxic problem" because they cannot stop purchasing auto insurance if they own a car, said Douglas Heller, director of insurance for the Consumer Federation of America. The toxicity is in the fact that consumers either reduce their coverage or go without it, he added.
"When the choices are between auto insurance and medication or food, [consumers] can't take the risk with medication or food. But they can take the risk with auto insurance," Heller said in an interview. "That's the risk that we all take together when people choose to go insured or not — or are forced to go uninsured. So we have a real concern that there's going to be a spike there."
Risky choices for consumers
From his conversations with consumers, Heller found that many people are reducing their coverage to save money.
Some of those changes include eliminating liability coverage, which financially protects drivers if found at fault for an accident. Drivers are also halting comprehensive coverage, which covers losses when a vehicle is in an accident not caused by a collision, including theft, vandalism, hail, and hitting an animal.
"We're hearing a lot about not just the pain, but also the choices to reduce coverage, just finding a way to save money," Heller said. "We're concerned that this has a potentially broad impact beyond just a pain in the wallet because it actually drives people to go on the roads uninsured or not drive the car when they really need it."
Heller said instead of cutting coverage, consumers need to look at different companies to find the right coverage and the right price.
"We tell people all the time that shopping around will get you some savings," Heller said. "You're not going to get out from under the strain of these high prices because the high prices are everywhere, but there are differences between companies."
One company attempting to get people to change their insurer is Geico Corp. which has started offering a "Welcome Factor" discount to new customers.
'Old and dated'
Insurers such as The Allstate Corp. and The Progressive Corp. have cited increased loss costs and inflation among the reasons for their pursuit of higher auto insurance rates.
Paul Tetrault, senior director for personal lines for the American Property Casualty Insurance Association, said in an email to S&P Global Market Intelligence that auto insurance premiums have increased "for the simple reason that the cost of what goes into auto insurance has been rising."
Among the reasons for the high costs, Tetrault said, are "cumulative years of record-high inflation" that have "greatly increased the cost of repairing and replacing cars." He said cars with advanced technology such as cameras and sensors need more parts to be replaced and have boosted labor costs.
Allstate, which booked net losses in six consecutive quarters before reporting a net profit in the fourth quarter of 2023, has aggressively pursued rate hikes nationwide, especially in California, New York and New Jersey.
Allstate had stopped writing new business in those states, and CEO Tom Wilson said during a conference call in November 2023 that the insurer would reduce its footprint in those states if its rate requests were not approved.
The following quarter, Allstate announced that California had approved a 30% hike in auto rates and had started writing new business "across all channels" in the Golden State.
Tetrault also placed some of the blame for the high cost of insurance on drivers who are "engaging in riskier driving behavior, such as speeding, distracted driving, and impaired driving, which increases injury and collision claims costs and compounds the effects of inflation."
The Florida market is one example where inflation has severely impacted the cost of insurance. Private auto insurers in the Sunshine State had a cumulative ratio of 94.5% in 2022 for direct incurred losses and defense and cost containment expense, which covers expenses paid or incurred for defense, litigation and cost containment services.
Legislators addressed some of the issues behind that ratio by enacting major tort reforms in May 2023. The law eliminated one-way attorneys fees and fee multipliers, changed standards regarding comparative negligence and modified bad-faith rules when insurers are sued.
However, consumer advocate Heller said the narrative insurers are talking about around inflation and loss costs is "old and dated." He said the industry "is way behind the inflation curve and they like it there."
"They're still giving us data from 2022 and are talking ... about the supply chain in the wake of the pandemic and ... the high price of cars," Heller said. "I understand that there are more computers in cars than in the 1990s, but that's been the case now for several years."
Heller said the situation has created a "self-fulfilling prophecy where the insurance industry, at this point, is one of the key drivers of inflation."
Regulators 'thread the needle'
Insurers took advantage of a hard market in 2023 as the 10 largest private auto underwriters raised their premium rates by 24% or better. Farmers Insurance Group of Cos. had the largest change at 34.7%, Liberty Mutual Holding Co. Inc. saw a 31.1% increase, and Allstate saw its rates increase 30%.
State regulators, such as Nevada Commissioner of Insurance Scott Kipper, face a dilemma whenever they go through the rate approval process with insurers.
"It is a difficult decision because you need to weigh the challenges to the everyday consumers of these products," Kipper said in an interview. "Then we see challenges for insurers in operating in other states where if they don't get a rate or what they feel is the rate they need, they start retreating or going away, and we don't want to let that happen.
"It's a real challenge for us to kind of thread that needle to make sure we have enough carriers to ensure great competition and not push carriers out because they feel like they can't break even or make a slight profit in our state," Kipper said.
The states with the largest effective rate increase in 2023 were Nevada at 28.3%, Minnesota at 19.8% and Washington with a 19.7% increase.
As auto rates have increased, so has the number of calls from consumers to Kipper's office with questions such as why a consumer who has never filed a claim or had an accident is still paying higher rates. Letting that consumer know that the insurance market involves individual drivers "pooling for a greater good" is part of the education that consumers need to understand, he added.
"We still have work to do on educating our consumers," Kipper said. "We need to make sure that consumers know we're aware of what's driving this ... consumers [need to] make sure they are shopping around, bundling their policies as much as they can and make sure they're not paying for more coverage than they need."
As far as when the price of paying for that coverage will level off, Kipper said nothing is certain.
"I wish I had a crystal ball and could say with any level of specificity that it's going to end in six months or 12 months or 24 months [but] I don't think anybody knows," Kipper said. "We anticipate some sort of leveling off over the course of the next 12 to 18 months, but it's just hard to say anything for sure at this point."