• Sun. Dec 3rd, 2023

Car Auto Insurance

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Here’s why auto insurers are raising rates as car prices ease

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More wrecks, fewer shops mean higher premiums

Average motor vehicle insurance prices rose by 17.1% in May versus a year ago, according to the consumer price index.

That’s among the largest annual increases of any consumer good or service, bested only by prices for margarine, frozen vegetables, motor vehicle repair and meals at schools and employee sites, according to CPI data.

Prices were up 2% alone between April and May.

About a third (31%) of U.S. auto insurance customers say they experienced a rate increase during the past year, according to a recent study by J.D. Power.

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The average consumer pays $2,014 a year in premiums for “full coverage” auto insurance, or nearly 3% of their income, according to a 2023 Bankrate study. (These policies generally include liability and collision coverage.)

Many factors have conspired to push up the cost of car repairs, which ultimately feeds through to insurance prices, economists said.

For one, many auto body shops and auto maintenance companies went out of business during the pandemic, which has reduced their supply and driven up repair costs, said Mark Zandi, chief economist of Moody’s Analytics.

“The pandemic has been really disruptive to the auto repair business,” he said.

Car wrecks also surged in 2022.

Deaths from car crashes in the first quarter of 2022 were the highest in two decades, according to the U.S. Department of Transportation. That dynamic puts financial pressure on insurers that receive an influx of insurance claims for car damage.

Auto insurers lost 12 cents on each dollar of customer premiums paid in 2022, on average, according to J.D. Power — the worst showing in more than 20 years.

That left insurers few options but to raise premiums, J.D. Power said. Customer satisfaction then plummeted, falling at its most rapid pace in two decades, it added.

“They’ve really juiced up those premiums,” Zandi said. “At some point — and I think we’re getting there — people are going to balk.”

Vehicle prices moderate after pandemic-era surge

A “perfect storm” of pandemic-era factors like snarled supply chains and a shortage of auto parts like semiconductors ran headlong into ballooning consumer demand, said Charlie Chesbrough, senior economist at Cox Automotive.

The pace of vehicle sales in March, April and May 2021 was at its highest since the Great Recession, Chesbrough said. The U.S. Federal Reserve had cut borrowing costs to near zero in early 2020, and consumers built up a cash stockpile during the pandemic by staying home and via government relief.

In other words, a ton of consumers wanted to buy cars that were in short supply, driving up prices.

Now, however, the dynamic has somewhat shifted.

They’ve really juiced up those premiums. At some point — and I think we’re getting there — people are going to balk.

Mark Zandi

chief economist of Moody’s Analytics


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