Auto insurance spike hampers inflation fight
in dampening the “mission accomplished” mood on infla- tion that was bubbling up in markets at the beginning of the year.
According to a recent pri- vate-sector estimate, the average annual premium for full-coverage car insur- ance in 2024 is $2,543, com- pared with $2,014 in 2023 and $1,771 in 2022.
That spike has a variety of causes, but the central one is straightforward: Cars and trucks are pricier now, so insurance for them is, too.
The cost of buying and owning a vehicle constitutes a sub- stantial chunk (about 10%) of the entire consumer price index used to track U.S. infla- tion. From January 2020 to January 2024, the cost of a new vehicle rose more than 20%, and the cost of used cars was up even more, while vehicle repair overall increased 32%. Shortages of computer chips and other supply-chain issues had a brutal impact on auto production and created bottlenecks that drove up purchase prices, which in many cases haven’t gone down.
In that context, the increase in vehicle insurance premiums of about 40% since Decem- ber 2019 “appears reason- able,” said Mark Zandi, the chief economist at Moody’s Analytics.
Insurers are for-profit firms in the business of covering the cost of a wide array of inci- dents. So when their poten- tial liabilities spike, compa- nies say premiums need to rise as well so expenses do not outstrip their revenues.
As recently as the fourth quarter of 2022, large under- writing losses brought Allstate a net loss of $310 million, even though it had increased pre- miums.
“The classic example is that, you know, a bumper used to be a cheap replacement part, and it’s no longer that way because you have advanced sensors in there — that makes it quite an expensive propo- sition,” said R.J. Lehmann, a senior fellow at the Inter- national Center for Law and Economics, a nonpartisan research center.
Companies have also reported more accidents, and more severe ones, which lead to greater bodily injury and property damage as well as higher medical payments — all of which insurers can be liable to cover based on the breadth of the policy, hurting net income margins.
“Insurers are coming to terms with this,” said Sonu Varghese, the macroeconomic strategist at Carson Group, a financial firm. “I’m sure there’s some good old-fash- ioned margin protection going on, too.”
Another force that prompted insurers to raise premiums was the rapid increase in interest rates that the Federal Reserve began in 2022. To smooth returns and cash flow, insurers often rein- vest their proceeds. In 2021, insurers were holding loads of assets that would lose value if short-term interest rates rose. When those interest rates more than quadrupled, the balance sheets of many insurers were bloodied. (Now, however, these insurers have the benefit of reinvesting leftover cash at new, higher rates.)
In recent months, trading moves on Wall Street and the estimates of industry analysts indicate that the big insurers have fully turned things around.
Shares of Travelers and Allstate hit record highs after the companies announced another round of premium increases that are expected to cover billions of dollars more than the annual claims it expects to pay. Shares of Progressive, known for its commercials with the fictional saleswoman Flo, have soared nearly 20% since the beginning of January, driven by a similarly anticipated improvement in profit margins.