The Rising Costs of Car Insurance and Its Impact on Inflation
In recent months, car insurance costs have been on the rise, contributing to a faster-than-expected increase in inflation. According to data released by the U.S. Bureau of Labor Statistics, car insurance prices as part of the consumer price index rose by 2.7% on a monthly basis and 22.2% on a year-over-year basis. While auto insurance remains a small portion of the overall CPI with a 2.85% weighting, the continuous increase in costs is adding to the already expensive burden faced by vehicle owners in the United States.
The surge in auto insurance costs is occurring alongside historically high prices for new and used vehicles since the onset of the coronavirus pandemic. Additionally, the cost of repairing vehicles has become more expensive due to supply chain shortages, increased mechanic wages, and the integration of advanced technologies in modern vehicles. The incorporation of microprocessors, cameras, and other sensors in newer vehicles has made even minor accidents more costly to repair, as these technologies are often damaged and require replacement.
David Sampson, CEO and president of the American Property Casualty Insurance Association, explained that the rising premiums are a result of the increasing cost of auto insurance components. However, he also noted that there is a lag time between when these trends emerge and when insurance companies adjust their rates accordingly.
The impact of rising car insurance costs on inflation is reminiscent of earlier concerns about the high prices of used cars. The Biden administration previously attributed a surge in inflation to used car prices in January 2022. Now, with auto insurance costs also on the rise, it becomes clear that multiple factors are contributing to the overall increase in inflation.
The escalating expenses associated with car insurance have led to dissatisfaction among both consumers and insurance companies. J.D. Power reported that auto insurers experienced their worst performance in over 20 years in 2022, losing an average of 12 cents on every dollar of premium collected. In response, insurance companies have raised rates, resulting in decreased customer satisfaction. However, it is important to note that insurance premiums are based on actuarial science and loss trends, rather than arbitrary decisions by insurers.
The cost of vehicle insurance varies depending on providers, drivers, coverage options, and location. While liability coverage is mandatory in almost every state, there are numerous additional coverages that may or may not be required. As a result, many insurance companies have started offering usage-based insurance (UBI) programs that utilize telematics data to determine the cost of policies. These programs have gained popularity, with participation rates increasing from 17% in 2016 to 26% for new customers. Customers participating in UBI programs tend to have higher satisfaction levels, and the usage of such programs is expected to continue rising as insurance costs increase.
According to J.D. Power’s U.S. Auto Insurance Study, Geico, Progressive, State Farm, and Liberty Mutual ranked above average in terms of UBI programs. USAA, which serves military personnel and their families, ranked the highest. However, despite the availability of UBI programs, overall customer satisfaction with auto insurers has reached a more than 20-year low due to the rising costs of insurance.
In conclusion, the rising costs of car insurance are contributing to an acceleration in inflation. Factors such as expensive repairs due to advanced vehicle technologies and supply chain shortages, along with historically high prices for new and used vehicles, have led to increased premiums. While insurance companies are adjusting their rates based on actuarial science and loss trends, customer satisfaction has decreased. Usage-based insurance programs have gained popularity as a way to offer discounts to safer drivers, but overall satisfaction with auto insurers remains low. As costs continue to rise, it is crucial for consumers to explore their options and consider participation in UBI programs to mitigate the financial burden of car insurance.
