Why rising car insurance rates are outpacing inflation

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Why rising car insurance rates are outpacing inflation

Car figures rising on top of coins.

The past few years have been tumultuous in a post-pandemic insurance world. For the first time in recent memory, the auto insurance industry faces substantial loss pressures on multiple fronts. To maintain viability, rates have increased concurrently with this uptick in claims costs. Way.com provides context.

These are being driven by several factors:

Loss severity: While supply chain issues have mostly receded, the increased cost of parts and labor translates directly into higher repair costs. Further complicating this are today’s vehicles and their integrated safety devices, parking sensors, integrated body panels, and vehicle construction designed to crumple around passengers to absorb impact. What was once a “fender bender” in a parking lot that involved dent removal and paint now contains thousands of dollars in electronics and takes specialized labor to install. This is measured as loss severity, or the average amount paid out in an average claim—and this number has seen an 82% rise over the past decade.

Loss frequency: Drivers emerged from a pandemic to newly crowded roads and a more constantly connected environment. Distracted driving is a major culprit and has driven accident rates to new highs, with more vehicle accidents per mile driven. For the first time in decades, auto accident-related fatalities have begun to increase as well. More accidents, plus more expensive accidents, is a combination of higher premiums.

Medical expenses: Medical expenses are rapidly escalating, leading to an increased “large loss” rate, wherein policy limits are reached, frequently through lengthy court processes. These additional legal fees, medical expenses, and administration costs have far outpaced the CPI.

Carrying costs: The time from opening to closing the claim has stretched. Due to staffing limitations on the claims side and labor shortages on the repair side, claim files are taking longer, which has its own ancillary costs in rental and substitute auto coverages and storage fees.

Car insurance costs are currently the #1 driver of inflation, and they are a substantial part of every household’s budget—and rates will vary wildly from state to state. For example, the average in Georgia would be considered extremely high in California regarding relative average premiums. Various reasons play into this variance, and rates vary significantly from driver to driver. The core factors that drive rates are location, years of driving experience, prior insurance and loss history, and driving record. A driver with a solid history of maintaining insurance, with zero to few claims, and 20 years of clean driving experience will see a much lower premium than a newly licensed driver or one with a poor driving history—however, that same driver with the lower rate could see their rate jump by simply moving to an area with a higher accident frequency or a state with increased weather risks. The choice of vehicle will also be tied directly to premium rates.

Every state requires some level of insurance. However, no state requires coverage for your vehicle—they all require some protection for damages a driver may be liable for due to a driver’s negligence.

Every driver who is looking to save on their insurance costs or find better coverage than what they have currently should look at what they need to be protected against when considering which coverage options to choose from, along with their own driving habits—which may have changed dramatically in the past few years. If the vehicle is owned outright and wouldn’t pose a significant loss in the event of a theft or collision, reducing coverage to state-mandated liability may make sense. If it’s the only vehicle in a busy household and would represent a significant disruption if it were no longer available, you may want to stretch that budget to ensure every situation is accounted for.