How have car insurance rates fueled inflation?

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

The Bureau of Labor Statistics reported price growth It accelerated to 3.5% in MarchFrom 3.2% in February.

Few categories had as big a year-over-year jump as auto insurance, which was up 22% as of March 2023, the most significant year-over-year jump in that category since 1976.

Over the past few years, average auto insurance rates have increased by 43%.

As of April National Average cost of car insurance It's $2,314 per year for full coverage and $644 per year for the minimum, according to Bankrate.

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

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

One major factor is simply the high cost of modern vehicles themselves. Today, a new car costs about $10,000 more than it did before the pandemic. We blame supply chain issues that have led to higher cost of vehicle parts, increased labor costs and customer demand, which has naturally led to higher prices.

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

More complex and expensive repairs also take longer, and that shows up in higher vehicle costs, Passmore said. The shortage of workers led to higher wages for technicians.

At the same time, the high cost of purchasing a car has prompted some drivers to keep their current cars longer. As a vehicle ages, the likelihood of breakdowns rises, increasing demand for repair services, said Sarah House, managing director and chief economist at Wells Fargo.

“Insurance companies are trying to recover claims that are very expensive,” House said.

There are other factors that come into play as well. According to the Insurance Information Institute, which represents insurers and the insurance industry, the severity of claims, including medical costs and litigation costs that arise in claims disputes, is also on the rise.

In the years immediately following the onset of the COVID-19 pandemic, insurance companies suffered huge losses. This is partly due to an increase in bad driver behaviour. As a result, they have pushed state regulators, which set how high interest rates can go, to let them charge higher premiums, while, in some cases, threatening to leave states entirely if they do not. According to S&P Global Market Intelligence, these companies have been able to win significant interest rate increases as a result.

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

Insurers have been filing for rate increases throughout the end of 2023 and the beginning of this year, Bankrate analyst Shannon Martin said in an email. Such price changes only affect auto policies at renewal, and American drivers are starting to feel their impact, Martin said.

“Auto insurance inflation is tough, and while inflation has slowed and supply chain issues have improved, the premium increases we are seeing and will continue to see in 2024 are based on the losses carriers have seen over the past few years,” Martin said.

“The ultimate goal is price stability in the insurance industry, but that may not happen until sometime next year.”