It’s clear car insurance rates rose in 2022. But why exactly did the cost of your car insurance policy go up? Let’s examine six reasons for the rate hikes.
1. Increased Inflation From 2021 Into 2022
Since early 2021, the country has seen an increase in inflation for a variety of reasons. The COVID-19 pandemic caused shortages in manufacturing and hampered shipping lines, the fiscal response to the pandemic increased the money supply in the market and the 2022 Russian invasion of Ukraine increased the prices of oil and commodities. As inflation continued throughout 2022, car insurance was just one thing that became more expensive.
According to the Bureau of Labor Statistics, the consumer price index rose by 7.7% between October 2021 and October 2022. The BLS also reports that auto insurance premiums rose by an average of 12.9% in that time period. So if your car insurance rate increased by about 10%, you’re in the same boat as many other drivers.
Similarly, the bureau reports that the average cost of labor increased by 5% from September 2021 to September 2022, which means car insurance companies may be spending more on their staff.
2. Increased Repair Costs
The cost of vehicle repairs has also increased over the past year. Since an auto insurance policy pays for repairs after an accident, this is another reason insurers have been raising their rates.
Nathan Weller, insurance staff writer for Fit Small Business and a licensed claims adjuster in 13 states, says, “The insurance industry as a whole is raising rates. There are several factors, but all of them come down to the high loss ratio companies are experiencing.
“Since the end of the lockdown, supply chain issues and backed-up shops have caused the costs of all claims, including minor claims, to skyrocket,” he adds.
According to the BLS, motor vehicle maintenance and repair costs rose by an average of 10.3% from October 2021 to October 2022. More specifically, the price of bodywork rose by 13.1% on average and repair costs rose by 13.2%.
A repair that used to cost $100 would now cost $113 on average compared to 2021. But if there’s a shortage of a particular component, the repair could be even more expensive relative to 2021. Add to that the increase in labor costs, and car insurance companies are having to fork over a lot more money for repairs. Those costs factor into average rates, and insurers pass the increases on to policyholders.
3. Supply Chain Slowdowns
The COVID-19 pandemic shut down factories and trade routes all around the globe in 2020. Automotive manufacturing is still on the road to recovery, and some parts remain hard to find and source. In particular, a microchip shortage caused manufacturers to cut about 4.26 million vehicles from production in 2022, according to Automotive News.
Supply chain issues have also affected repair shops across the country. Some parts that were easy to get before the pandemic are harder to find now. A mechanic may have to order a part from overseas and wait weeks to complete a repair that would have taken a few days before. If your car spends more time in the shop, you’ll need a rental car for longer as well.
4. Increased Health Care Costs
Health care costs have also been on the rise in recent months. According to the BLS, medical costs rose by an average of 5.4% from October 2021 to October 2022. However, what the average person pays for health insurance rose by a whopping 20.6%.
Medical payments coverage (MedPay) and personal injury protection (also called PIP insurance) cover medical bills for you and your passengers when you get into an accident. Since car insurance companies need to pay more for medical services, they increase rates to compensate.
5. Environmental Events in Your State
When one region of the country has an increase in severe weather or natural disasters, the number of vehicle damage claims increases in the area. Car insurance companies can raise rates in the state to compensate. Even people who didn’t file claims may pay higher rates in the area after the environmental event.
Say a car insurance company expects a certain number of cars to have flood damage in a state in a year. Now, if a serious storm causes 10 times that amount of flood damage, the money to pay all those claims will reduce the company’s reserves. When the company reassesses its rates, it could raise prices to recover funds.
6. Increased Insurance Claims
Toward the start of the COVID-19 pandemic, many people were staying at home and avoiding contact with others. That meant fewer cars were on the road. Fast-forward to 2022 and people have returned to pre-COVID levels of driving. Along with the increase in driving came an increase in accident claims.
Weller gives an example of how labor and supply-chain issues could make even a minor repair more expensive for insurance companies now. In this scenario, the at-fault driver’s insurance company pays for the claimant’s headlight to be repaired.
“Even though the car is drivable, legally they can’t drive it,” he says. “But, there are no body shops that can see the car for three months, and the headlights are on backorder for four months.
“There is also a shortage of rental cars because rental companies sold off significant parts of their fleet during COVID to generate revenue. Now a minor claim is going to cost thousands and very well could exhaust limits just with transportation expenses for months as the claimant waits on the shop to fix a headlight.”
According to S&P Global, many U.S. insurers saw double-digit percentage increases in their loss ratios for private passenger car insurance in the first quarter of 2022 compared to the prior year. The auto loss ratio shows how much an insurer spends on claims per dollar collected from premiums. So for example, Allstate was spending 20.4% more on claims compared to premiums than it was the year prior.
The combined ratio compares total losses and expenses to premiums. A ratio under 100 means the company is spending less on claims than it makes in premiums, while a ratio over 100 means the opposite. Allstate’s combined ratio was 102.1% in the first quarter of 2022, so it was paying more for claims than it received in premiums.