DETROIT – The surge in auto insurance expenses has played a significant role in the acceleration of inflation, surpassing expectations in March and further burdening U.S. vehicle owners with escalating costs.
According to data released on Wednesday, car insurance prices within the consumer price index (CPI) surged by an unadjusted 2.7% on a monthly basis, while experiencing a year-over-year increase of 22.2%. The CPI serves as a vital measure of inflation, reflecting the comprehensive cost of goods and services across the economy.
The escalation in auto insurance costs has been a persistent trend, with prices consistently climbing since December 2021. Since then, costs have surged by 45.8%, as reported by the U.S. Bureau of Labor Statistics. Despite this, auto insurance remains a relatively minor component within the CPI, carrying a weight of 2.85%.
This spike in costs compounds the already high prices for both new and used vehicles, a trend exacerbated by the lingering effects of the coronavirus pandemic. Additionally, the expense of vehicle repairs has surged due to disruptions in the supply chain, increases in mechanic wages, and the integration of advanced technologies within modern vehicles such as microprocessors, cameras, and other sensors – all contributing to elevated vehicle and insurance expenditures.
Sean Tucker, senior editor at Kelley Blue Book, highlighted the multifaceted nature of the issue, stating, “There’s not a single factor, but I think the biggest factor is a combination of new cars being more expensive, so if you total your car, the replacement cost is really high, and a fender bender is very expensive right now. The technology in the cars, it’s a very specific problem.”
Fender benders, which once necessitated the replacement of plastic or steel bumpers, now pose a greater financial strain due to the potential damage to integrated cameras, proximity sensors, and other sophisticated technologies essential for modern safety features and driving aids like cruise control, parking assistance, and emergency braking systems.
David Sampson, CEO and president of the American Property Casualty Insurance Association, emphasized the long-term nature of the issue, stating, “Premiums have been on the rise because the cost of what goes into auto insurance has been rising. There’s a long lag time between when the trends emerge and companies see these loss trends existing. It then takes time for them to build that into their rate application filings.”
The recent surge in insurance costs contributing to inflation marks a significant shift from earlier narratives. The Biden administration previously attributed rising inflation to soaring prices in the used car market in January 2022.
Mitchell, a specialist in automotive software for the collision repair and auto insurance sectors, noted that repair costs had been steadily increasing at an annual rate of 3.5% to 5% prior to the pandemic. However, since 2022, these increases have surged to 10% or more, with the average repair estimate for a vehicle reaching $4,721 in 2023.
The escalating costs have drawn ire from both consumers and companies. J.D. Power reported that auto insurers experienced their worst performance in over two decades in 2022, with an average loss of 12 cents on every dollar of premium collected. This financial strain has led insurers to increase rates, adversely impacting customer satisfaction.
David Sampson emphasized the actuarial basis of insurance pricing, stating, “What I always remind folks is that insurance is based on actuarial science, so it’s not a case of insurers just deciding that they want to increase premiums. The filings have to be based on actuarial loss trends in their rate applications in each state.”
The cost of auto insurance, mandatory in nearly every state, varies depending on factors such as provider, driver profile, coverage options, and location. With the list of optional and mandatory coverage options growing, many insurers have introduced usage-based insurance (UBI) programs, which assess premiums based on driver behavior using telematics data.
J.D. Power’s U.S. Auto Insurance Study found that UBI participation among new customers stood at 26%, with usage more than doubling from 2016 to 2023. Satisfaction levels among participants were notably higher, with price satisfaction averaging 59 points higher compared to non-participants.
As insurance costs continue to rise, usage-based insurance programs are expected to gain further traction, with insurers offering discounts or special rates for safer driving behaviors.
J.D. Power’s survey ranked UBI programs from Geico, Progressive, State Farm, and Liberty Mutual above average, with USAA, serving military personnel and their families, receiving the highest ranking.
Mark Garrett, director of insurance intelligence at J.D. Power, remarked on the downward trend in customer satisfaction with auto insurers, stating, “Overall customer satisfaction with auto insurers has plummeted this year, as insurers and drivers come face to face with the realities of the economy.”
