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Car insurance costs are rising – but it’s not because of rising prices
Like many consumers, President Biden speaks about contraction, unwanted feesIt is corporate price manipulation.
But the most surprising inflation right now comes from an industry that is suffering huge operating losses and has actually been undercharging consumers in recent years.
According to Wednesday’s CPI readingThe cost of auto insurance increased 22.6% over the past year, the biggest jump among the 28 major spending categories Yahoo Finance has tracked since 2021. Over the past four years, auto insurance has increased 57%, for an average annual award for almost $2,300according to Bankrate.
However, there are no windfall profits like the ones energy companies enjoy when the price of gasoline soars. Instead, U.S. auto insurers have endured three consecutive years of underwriting losses, meaning they have paid out more in claims and expenses than they received through the premiums we paid.
These losses totaled $33.2 billion in 2022, according to AM Best, a ratings agency focused on the insurance industry. Underwriting losses narrowed in 2023 to $16.9 billion, but S&P Global Ratings expects another year of red ink in 2024 before premiums again exceed costs in 2025.
The insurance industry overall is still profitable. Car insurance only makes up about a third of all insurance companies offered, in addition to home insurance and other types of coverage. The industry’s overall profit margin fell from 10.9% in 2021 to 4.7% in 2022, according to S&P Capital IQ. It may have recovered to 9.5% in 2023, but it is still below the 11.1% average for the S&P 500 as a whole.
So, as aggravating as the increase in premiums is for drivers, insurers are largely innocent.
“They are not price manipulation,” Patricia Kwan of S&P Global Ratings told Yahoo Finance. “What caught the insurance industry by surprise were the supply chain issues; there were a lot of shortages, the cost of repairs became more expensive and labor costs also rose.”
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The industry’s problems began with the COVID pandemic in 2020, which disrupted global supply chains and caused shortages of many goods, including auto parts needed for repairs and new cars themselves. Newer cars are also increasingly sophisticated, with sets of sensors and electronic components that are more expensive to repair. The cost of repairing motor vehicles has increased by 45% in the last four years.
Perhaps the most unforeseen factor affecting car insurance costs was a jump in mortality rates. There has been a long-term improvement in automobile safety, driven by better technology and other factors. But death rates in car accidents increased in 2020 due to a variety of potential reasons and have remained above pre-COVID levels since.
The story continues
Higher death rates indicate that accidents are becoming more serious, increasing repair and replacement costs as well as legal liability. Insurers base premiums on historical patterns and predictions of future behavior, but when real-world trends bring surprises, they throw insurance pricing models out of balance.
In most markets, prices quickly adjust to disruptions. Not in insurance. Most drivers have a six- or 12-month policy, so insurers may only change the price for a given customer once or twice a year.
Auto insurance is also heavily regulated, with carriers in most states requiring permission to increase premiums above certain levels. You can take it months or even years that insurance regulators allow carriers to increase premiums to levels that cover losses. These are some of the reasons why insurance premiums are only now adjusting to costs that began rising beyond normal levels at least three years ago.
Insurance regulators could try to force insurers to accept lower profits by keeping premiums lower. The risk, however, is that insurers will simply withdraw from a given market if it is not sufficiently profitable, leaving less competition, which could have the adverse effect of increasing costs for the consumer. Florida has struggled with exactly this dynamic in your home insurance marketwhich has suffered from an exodus of insurers and rising costs.
The good news is that the worst of the consumer price increases could soon be over. Insurers are cutting costs by advertising less and restricting other expenses. Accident rates and death rates are improving and car prices have stabilized after rising for three years.
Insurers also have an incentive to reduce rates if costs permit – because people buy, and it costs a lot more to acquire new customers than it does to keep existing ones.
“If they charge too much, they will lose efficiency and people will start abandoning their policies,” says Kwan. “It’s a delicate balance.”
The same applies to drivers trying to buy their cars.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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