The Retired Investor: Auto Insurance Premiums Keep Rising

Forget fuel and food, auto insurance leads the way in areas where inflation is ramping higher. The rise in premiums has far outpaced the overall inflation rate and we could see further gains in 2024. 

 

Auto premiums are up 43 percent in the past three years and there is no sign the rate increases are over. In 2023 alone, auto insurance prices rose 19.2 percent, as registered by the Consumer Price Index (CPI). The January 2024 CPI data just released this week shows a 20.6 percent increase from last year. It is one of the greatest contributors to the inflation rate and exceeded the price gains in almost every other spending category.

 

Industry analysts' best guess is that we could see another 10 percent increase this year before prices plateau. As it stands, consumers are paying an average of $1,785 per year for full-coverage insurance, according to AAA. That is a big jump from the 2019 pre-COVID costs of $1,194. What is behind this spike in premiums?

 

Back in the pandemic lockdown period, insurance premiums fell. Many cars (mine included) sat for weeks in parking lots. For me, I used our second leased car so infrequently that I gave it back to the dealer. Accidents declined and the roads were empty.

 

For whatever reason, when people got back on the roads in 2020-2021, the accident rate skyrocketed, according to the National Highway Traffic Safety Administration. Nearly 43,000 people died on U.S. roadways in 2022 which was 6,000 higher than in 2019. Accidents, injuries, and fatalities continue to climb as drivers embrace riskier behavior behind the wheel. That behavior costs insurance companies a boatload of money.

 

And let's not forget car thieves. Motor vehicle thefts jumped 29 percent last year compared to 2022. Given the price of replacing a new or used car, insurance companies are paying out more than ever before. It has gotten so bad that some insurance companies have refused to cover certain coveted Kia and Hyundai models in select locations that have become hot-wire targets for droves of criminals. 

 

The profitability of the insurance industry has suffered. The Insurance Information Institute reports that auto insurers paid $1.12 in claims last year for every dollar they collected in premiums. In 2024, that should drop a little (to $1.09) thanks to premium price hikes, but it is still going in the wrong direction. There are even more reasons premiums are rising.

 

Thanks to supply chain disruptions, rising wages, and parts shortages, the costs of repairing or replacing a car damaged in an accident are much higher than it was in 2020. The good news is that the trend in auto body repair prices is reversing. From 12 percent gains in 2022, costs slowed to "only" 3.3 percent in 2023.

 

Add in the higher cost of paying out for car rentals. Throw in the additional costs of higher legal services, and medical care for injuries when required, and you are starting to get the big picture facing your insurance provider.

 

I'm not done. Natural disasters, many of which have been the result of climate change, are fueling higher premiums as well not just in states prone to hurricanes and wildfires. Rainstorms, hail, floods, blizzards — all manner of weather conditions — are causing more and more damage to our automobiles throughout the country. Insurers are resorting to more than price hikes to deal with these trends.

 

Many carriers are pushing customers to move from standalone auto policies to bundled coverage, while at the same time raising deductions in both homeowners and auto policies from $500-$1,000 to $2,500-$10,000. Underwriters are also getting pickier in vetting potential clients.

 

If you have had a claim over the last several years for water damage, for example, they may ask what you have done to mitigate future damage. Other companies are excluding family members from your auto policy who may have had more than one car accident in the past.

 

Insurance regulators are caught between a rock and a hard place. They are finding it difficult to keep insurance premiums low enough for drivers to afford them while keeping insurance companies solvent. And there are repercussions when regulators balk at granting premium increases.

 

There have been several instances where some large property insurance companies have simply stopped writing business in states such as California, Texas, and Florida. In some cases, this has affected the availability of auto insurance as well. Is there anything you can do to lower your bill?

 

You can shop around. Browse the internet. Talk to your friends to see what discounts are possible. Check out at least three companies, and maybe more, if you have blemishes on your record. Companies tend to penalize tickets and accidents differently, so you may get a wider range of price quotes.

 

Bundling your auto and property insurance is another way to go. Accepting higher deductibles can also lower your premiums but have a care if you go that route. Too little insurance defeats the purpose. Another idea is to opt-in to a usage-based program where an app monitors your driving and tracks things like distracted driving, harsh braking, or speeding. Switch auto insurance companies if it turns out you are overpaying, no matter how friendly you may be with your agent. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.