The cost of car insurance in the United States has been skyrocketing over the past 18 months, with the annual inflation rate for motor-vehicle insurance hitting a record high of 19.1% in August. This has led to a significant increase in premiums, making it difficult for individuals to afford coverage.
One example is Morgan Avrigean, a communications strategist from Pittsburgh, whose car-insurance premium has jumped about 80% in the past 18 months to $720 for a six-month policy. Despite changing insurers twice and bundling her home and auto insurance, Avrigean has not been able to find affordable coverage. She is not alone in her struggle, as many Americans are facing the same issue.
The average cost of car insurance in the US is nearly $1,700 annually, a 17% increase through the first half of 2023. This represents a significant burden for most households, as auto insurance now accounts for about 2.4% of average household income. The rising costs can be attributed to soaring claims costs, which are closely tied to surging car prices. Both new and used car prices have risen sharply in recent years due to supply-chain issues and chip shortages.
In addition, the Covid pandemic has worsened Americans’ driving habits, leading to an increase in traffic fatalities. This has forced insurers to replace cars at much higher rates, resulting in staggering costs. Furthermore, routine repair costs have also risen due to supply-chain challenges for auto-parts suppliers and labor shortages at repair shops. The increasing complexity of vehicle systems, including electric and hybrid cars, has added to the cost pressure.
Extreme weather events have also played a role in lifting insurance-industry costs and premiums. While car insurance is not as affected by weather-related disasters as homeowners’ insurance, the number of weather and climate disasters in the US has been on the rise. This has prompted insurers to raise rates aggressively to cover the costs of these catastrophic events.
Insurance companies are struggling to make a profit from auto insurance underwriting operations. The industry’s average combined ratio for auto insurance hit 112.2% last year, indicating that companies are not making a profit. This trend is expected to continue into next year, with insurers’ combined ratio predicted to average 105.9% in 2023 and 101.2% in 2024.
Insurers need approval for rate increases, which can cause delays in implementation. Many of the rate increases initiated this year have not yet hit customers’ wallets or shown up in official inflation data. It is estimated that the aggregate approved rate change for this year will exceed 2022’s full-year increase of 11.1%, potentially climbing as high as 16%.
Despite the rate hikes, insurers are not benefiting much from increased premium prices. Reserve development, which is used to pay legitimate claims, is driving up combined ratios. Insurance companies have not fully anticipated the level of inflation on the loss-cost side, resulting in unfavorable reserve development in the auto business. This puts insurers in a difficult position with investors, as the industry’s outlook remains negative.
The rising costs of car insurance may lead to consumers buying less coverage. Nearly a quarter of car owners have already cut their coverage in the past year to reduce costs, while others have allowed their insurance coverage to lapse due to an inability to pay. This trend is concerning, as uninsured drivers could face legal consequences, and insurers may have to bear the brunt of these costs.
Overall, the outlook for auto insurance remains bleak. Prices are projected to continue climbing well into 2024, along with the number and size of claims. Insurers are struggling to make a profit, and investors are wary of the industry’s performance. As insurance becomes more expensive, individuals may face the difficult decision of cutting coverage or forgoing insurance altogether.