Soaring insurance costs hit as U.S. buyers get a break on car prices

A new form of sticker shock has hit American car buyers like Darin Davis.

In January, when the 56-year-old Dallas real estate agent renewed the insurance on the pearly white 2024 Cadillac XT4 that he bought just a few months earlier, the rate nearly doubled.

“It takes the fun out of owning a new car when you’re paying so much money,” said Davis, adding that if he’d known such a massive increase was coming, he might have opted for a less expensive model. But by then it was too late.

In one of the cruel twists of an inflation-weary U.S. economy, car prices are coming down after surging by record amounts during the COVID19 pandemic. But at least part of those gains for consumers are getting gobbled up by rising auto insurance rates that for some models now account for more than a quarter of the total cost of owning a vehicle.

Car prices have eased as the supply chain snarls of the pandemic — especially shortages of vital computer chips — have untangled and automakers boost inventories on their lots. Meanwhile, factors including rising costs associated with repairing increasingly complicated vehicles and more storm damage amid climate change is pushing insurance rates higher.

And car buyers aren’t the only ones with an axe to grind over insurance inflation. For Federal Reserve policy-makers working to lower inflation overall, it’s an example of the unwelcome surprises that have conspired to slow their progress.

HURTING AFFORDABILITY

The Consumer Price Index rose 3.5 per cent last month from a year earlier, according to the Labor Department. But auto insurance costs were up 22.2 per cent over the same period, the biggest increase since the 1970s.

Car prices, meanwhile, continued to moderate. New vehicle prices declined 0.1 per cent, compared to a year earlier, while used prices slipped 2.2 per cent. Car dealers are offering more incentives to buyers, which helps bring down up-front costs. The degree to which insurance rates are weighing on buying decisions is unclear, but there are signs it’s become a bigger factor, especially for consumers on tight budgets.

“We’re hearing from a number of shoppers that they’re declining to buy a car — or returning one — because they can afford the car but not the insurance for it,” said Sean Tucker, a senior editor at Kelley Blue Book, a car valuation and research company in Irvine, Calif.

Tucker said Kelley Blue Book recently added insurance guidance to its list of buying tips, urging shoppers to get an insurance quote before they put down any money.

Car insurance rates vary widely across the country and are influenced by everything from the cost that local collision repair shops charge to the potential for damage from tropical storms and wildfires. According to the insurance shopping site Insurify, the average cost in the U.S. for full auto coverage rose 24 per cent last year and now stands at just over US $182 a month. The company said 63 per cent of drivers it surveyed saw rates increase in 2023 and predicts rates will rise another seven per cent in 2024. But that figure could rise.