USA: You are not alone if you’re wondering why your car insurance rates increased. The average annual rate for full coverage policies in 2022, according to proprietary rate data from analytics company Quadrant Information Services, was $1,771. However, in 2023, the same policy may cost $2,014, representing a 14% increase. Bankrate’s insurance editorial team, comprising three licensed agents, delves into the reasons behind this.
Why is car insurance so expensive in 2023?
Let’s start by understanding how car insurance works at a high level before exploring the reasons behind the rising car insurance rates in 2023.
Car insurance can be compared to a pool. Your insurance company evaluates your rate based on your personal rating factors, collects your premium, and adds it to a hypothetical pool. The company then uses this pool to pay for claims of all those who are insured with them. Additionally, they use underwriting software and actuarial data to determine the reserve funds required in the pool to cover projected claims.
Your car insurance rate can be affected by certain individual rating factors that are specific to you. For example, car insurance companies may use your ZIP code to determine your rate in most states. If you move from a rural town to a busy city, your rate may increase because statistically, you are more likely to be involved in a car accident in an urban area due to the increased number of vehicles on the road. If your insurance company determines that you are more likely to file a claim at your new address, they may raise your rates to balance out the higher risk.
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Some rate increases are not specific to individuals and happen despite unchanged policies or driving habits. In case a company discovers that it lacks adequate funds in its pool to cover estimated claims, it must increase rates to restore its claims reserve by issuing rate increases on a regional, state-wide, or company-wide basis. These overall rate increases are the primary reasons for the increase in car insurance rates in 2023. We have researched the reasons behind the decrease in money in the hypothetical car insurance pool and how it impacts drivers across the country.
Inflation is a major challenge that the U.S. is still facing in the post-pandemic era, and its impact extends far beyond your household expenses, such as groceries or electricity bills. Even your car insurance rates are affected by inflation.
Think about the costs that may arise after a car accident, such as hospitalization, outpatient medical care, repair and replacement of car parts, labor expenses, and rental car fees. In the case of a total loss, a claims check is required to cover the cost of a new vehicle. Despite some indications that inflation may be slowing down, the prices of these vital goods and services remain elevated.
One exception to this trend is the decline in the cost of used cars, which is especially noteworthy given the recent unusual behavior of the used car market, where pre-owned vehicles often sold for as much as new ones. However, this dramatic decrease is merely the used car market readjusting after experiencing an unprecedented 37% price increase from December 2020 to December 2021. It should be noted that the other inflated claims-related costs may still outweigh the decreased cost of used cars. In other words, even if the overall price of a used vehicle returns to its previous level, car insurance rates for used vehicles may not decrease.
Bankrate interviewed Mark Friedlander, the director of corporate communications for the Insurance Information Institute, to gain insight into how the pandemic’s economy has affected the current car insurance market.
In 2020, inflation began to take hold and continued to soar through 2022. Despite this, stay-at-home orders and social distancing meant there were fewer drivers on the road, resulting in lower-than-average claims frequency. Consequently, car insurance companies did not feel compelled to raise rates in line with inflation. However, they are now playing catch-up. ALso Read Read: 10+ Cheap Insurance Quotes for Cars in the United States, It’s affordable
Greg McBride, CFA, Bankrate’s chief financial analyst, was asked about the increase in car insurance rates in 2023. He responded, “Although the growing price of vehicles and higher repair expenses have contributed to the recent rise in car insurance premiums, the escalating cost of litigation is not a result of the supply-demand imbalances that have fueled inflation.”
The rise in litigation could be attributed to a phenomenon known as social inflation, which is more complex to define than economic inflation. Essentially, social inflation refers to the prevailing attitude of the general public towards large corporations, including insurance companies. This attitude is influenced by various factors and can fluctuate over time, but currently, social inflation is high, potentially due to the economic challenges facing society, with income inequality being one of the drivers.
As a result of this negative sentiment, consumers are more inclined to:
Social inflation is a term used to describe the general public’s prevailing attitude towards big businesses, including insurance companies, and is harder to define than economic inflation. Currently, social inflation is high due to income inequality and our challenged economic environment. When social inflation is high, policyholders are more likely to file claims that they would have handled out of pocket. Moreover, they may feel that the claims payout was too low and hire an attorney to take the insurer to court, leading to higher litigation costs. This scenario is more common in personal injury protection claims. In insurance cases, juries are more likely to award a large settlement to the plaintiff if there are negative attitudes towards the insurance industry. These large settlements are also referred to as “nuclear settlements”.
Referring to the pool analogy, high social inflation leads to a larger amount of premium leaving the pool, resulting in insurance companies raising rates to ensure adequate funds for future claims.
In response to the pandemic, auto insurance companies refunded approximately $14 billion in premiums to their policyholders through give-backs and policy credits. During this time, claims frequency was low, and insurers had extra funds. Additionally, companies may have wanted to support their customers during the economic turmoil brought on by the pandemic.
The give-back programs provided by auto insurers during the pandemic may have served as a lifeline for many individuals who were struggling financially, but they also left insurers with reduced funds to manage the increased claims frequency that followed when drivers returned to the road in 2021 and 2022.
Claims frequency and severity
Despite the decrease in traffic levels during the pandemic, drivers who were on the road showed more reckless driving behavior. The National Highway Traffic Safety Administration (NHTSA) conducted a study that found more fatalities due to traffic accidents in 2020 than in any year since 2007. Moreover, speeding-related accidents increased by 11 percent and alcohol-related accidents by nine percent in 2020. Unfortunately, this trend has continued to worsen, with an estimated 9,560 people dying in car accidents during the first four months of 2022, which is seven percent higher than the same period in 2021.
According to Bill Madison, CEO of LexisNexis’ insurance segment, it is unlikely that car accident claims will decrease to pre-pandemic levels, and rates are unlikely to return to those levels either. Even if you did not have an accident, your premiums may still be impacted if claims rise in your area. Although rates might stabilize in the future, insurance companies have had to raise premiums to cover the increased risk.
According to J.P. Morgan, the computer chip shortage that affected 2021 and 2022 is coming to an end, although there may still be some ways to go. However, the United States is currently facing a significant labor shortage.
According to the U.S. Chamber of Commerce, even though the U.S. added 4.5 million jobs in 2022, the country is still short of almost three million workers compared to February 2020. The reasons for this labor shortage are varied, including individuals opting to stay home to provide childcare, starting their own businesses during the pandemic, and taking early retirement. Unfortunately, nearly 275,000 working-age Americans have also died from COVID as of February 2023.
For car insurers, this labor shortage translates to higher rates. For instance, if you were involved in a car accident causing significant vehicle damage, a shortage of adjusters in your area could mean a longer wait for your claims estimate. This delay could result in a longer rental car period, exhausting your rental car reimbursement coverage. In some cases, there may be enough adjusters but a shortage of mechanics or parts due to a lack of workers. Although rental car reimbursement may have a low maximum payout amount (ranging from $900 to $1,500 depending on your policy), when multiplied by the millions of policyholders who may find themselves in similar situations, these payouts can quickly add up.
No one can predict when or if car insurance rates will decrease in the future. According to Cate Deventer, an insurance writer and editor for Bankrate, the process of filing for a rating change, receiving approval, and implementing the change takes time, so car insurance companies are still catching up with the inflation from 2022. Therefore, despite inflation cooling down in recent months, it is likely that car insurance rates will continue to rise in 2023. Car insurance rates do not increase immediately, as actuaries need time to review accident statistics based on historical data before deciding whether a rate hike is necessary to meet their company’s claims obligations. If a rate increase is necessary, the company must file a request with the Department of Insurance in each state where the hike is required.
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The reasons behind the current car insurance market are complex and multifaceted. It’s not solely due to inflation or the shortage of computer chips, as those issues are resolving themselves. Rather, it’s important to consider the challenges that our economy and people have faced in the last three years and acknowledge that full recovery takes time. It’s also possible that the world we knew pre-COVID may never fully return.
Despite this, there are opportunities to find better rates and save money. With rates in flux, comparing quotes and taking advantage of discount opportunities from different companies can be a smart move. Additionally, it’s crucial to avoid engaging in post-pandemic risky driving habits, not only for the sake of your rates but for the safety of yourself and others.