December 8, 2023


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Auto Insurance Rates Are Rising, and Here’s Why

Consumer prices have surged across many sectors in recent months and car insurance rates have helped drive the trend. The latest motor vehicle insurance index—tucked within the Consumer Price Index (CPI)—was up 16.9{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} in May 2021 vs. a year ago, following a 6.4{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} rise in April from the previous year. But rather than a large-scale price hike, says James Lynch, chief actuary and senior vice president of research and education at the Insurance Information Institute (III), much of what the country is seeing is simply a return to pre-pandemic premiums.

Key Takeaways

  • Car insurance premiums are on the rise this year.
  • Some of that is due to the fact that insurance costs declined in 2020 because consumers were driving less and insurers issued refunds.
  • Premiums are now returning to pre-pandemic levels, as people drive more and are expected to file more claims.
  • A rise in auto repair costs is also playing a role in the increases.

Insurer Refunds Cut Costs Last Year

A year ago last spring, car insurers were refunding what amounted to $14 billion in total to policyholders because of a big drop in miles driven—as well as in insurance claims— prompted by the pandemic. Those rebates pushed down the price of insurance, with rates remaining flat or declining, and the official inflation numbers reflected it, Lynch says. (The CPI considers policy premium refunds or rebates to be price reductions.)

So, while insurance prices may now be increasing relative to the lows experienced at that time, they haven’t widely surpassed average pre-pandemic costs quite yet and are nearly unchanged from June 2019, according to the motor vehicle insurance index’s historical database. 

Meanwhile, a return to pre-pandemic driving levels will mean potentially more accidents and a higher number of costly claims for insurers to cover, the III notes.

Still another factor is the cost of car repairs, which has also climbed, although May’s 2.8{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} increase was slightly lower than each of the previous four months of 2021, CPI data shows. Delays in repair time due to chip shortages, supply chain disruptions, and a labor crunch share the blame, the III says.

Return to Normalcy Will Test Insurers’ Margins

Amid the changing backdrop, Wells Fargo Securities senior equity analyst Elyse Greenspan, CFA, predicts the current situation will remain challenging even for the best car insurance companies throughout the fall, as both driving and accident claims increase.

“We are also keeping an eye on a few other trends that could serve as headwinds to personal auto margins,” Greenspan commented in a recent research note provided to Investopedia. “We expect margin pressure to be driven by higher auto repair/replacement costs (due to the chip shortage), increasing vehicle sales, rising used car prices, and a return to more normalized driving trends.” 

Nevertheless, the current auto insurance market is still soft, Greenspan notes, adding that not all insurers are under pressure to raise rates. “It’s still a good environment for consumers who are purchasing auto insurance,” she told CNBC last week.

New-Car Sales Could Also Fuel Rate Rises

At the same time, there’s evidence that consumers may be ready for a change when it comes to what they have parked in their garage. The average age of U.S. cars and light trucks rose to a record 12.1 years in 2020, according to a report by the research firm IHS Markit. But that rise in average age could be short-lived, the report says, as new car sales continue to increase.

“The microchip shortage and subsequent inventory levels for new vehicles have created a situation in which used vehicle values have gotten extremely high,” says Todd Campau, associate director of aftermarket solutions at IHS Markit. That boost may encourage car owners to sell or trade up to something newer, he says. And new cars also tend to be costlier to insure.